Bottom Feeding In Mobile

| About: BlackBerry Ltd. (BBRY)

It's safe to say that Apple (NASDAQ:AAPL) and Google's (NASDAQ:GOOG) Android dominate the smartphone market. But what's left is still enough market share and profits for a third competitor. However, there doesn't appear to be enough room for four, leaving BlackBerry (NASDAQ:BBRY) and Nokia (NYSE:NOK) to battle it out. Currently, BlackBerry is third, but Nokia is gaining some ground with its new Lumia Windows phone. From an investor viewpoint, let's check out which of the two is a better investment.

The BlackBerry story

BlackBerry makes its namesake BlackBerry handheld device that became famous for combining a mobile phone with its email platform. It was a staple for businesses and the must have device for Hollywood celebrities with its proprietary PIN technology. Celebrities liked it because they didn't have to give out their mobile number and instead could just give out their BlackBerry PIN number. BlackBerry (formerly Research In Motion) has been in a free fall for the past five years. The stock peaked in 2008 above $140 and traded under $10 for much of 2012. However, the stock has rebounded this year on optimism for the new BlackBerry 10.

During the last year BlackBerry has taken steps to regroup and focus on developing the 10. BlackBerry's founders are out and new CEO Thorsten Heins has taken over. The company implemented a strong marketing campaign and has gotten mostly positive reviews for its new 10. More importantly, applications are being developed for the 10 and that's a very positive sign that BlackBerry is here to stay.

Besides the BlackBerry operating system and brand, the real value in BlackBerry lies in its patent portfolio. Gus Papageorgiou, an analyst at ScotiaBank in Canada, agrees. In his report he said:

BlackBerry currently holds roughly 7,597 patent grants and applications. To put that into context in 2011 Nortel sold over 6,000 grants and applications for a price of US$4.5B. Again, it is difficult to draw any conclusions on these numbers alone. The Nortel patents went up for sale during a highly litigious period and were the only available extensive patent portfolio at the time - the economic laws of supply and demand worked very much in its favour. However, until this article we had assumed that BlackBerry's patent portfolio was not really all that strong. This article has challenged that position as it clearly indicates that BlackBerry maintains one of the largest, fastest growing and oft cited patent portfolios in the world. We had been putting a value of roughly $1,139M for BlackBerry's patents which was simply the value of the acquired Nortel patents ($770M) and the purchased Ericsson patents ($369M). But at this stage we believe that number is far too conservative. If BlackBerry's patents were only worth half of the Nortel patents (and remember there are more of them at 7,597 vs. roughly 6,000) that would put the value at $2.25B, over twice the value we had estimated.

Besides the patents, the company right now has a market cap of about $7.57 billion at $14.69 a share. The company also has $2.65 billion in cash and no debt. If the patents are worth $2.25 billion and there's $2.65 billion in cash, that means your getting a business that had revenues of $11.07 billion for only $2.67 billion.

BlackBerry has a few hedge funds with several million share positions (see them all here). The most notable hedge fund interest for BlackBerry includes notable hedge fund Fairfax Financial, which owns over 50 million shares -- nearly 10% of the mobile phone company. What's more is that Fairfax's BlackBerry position makes up 24.5% of the hedge fund's portfolio and is its largest public equity holding (check out Fairfax's other stocks).

What about Nokia?

Nokia has tied its fate to the new Microsoft (NASDAQ:MSFT) Windows OS. Nokia now accounts for 80% of the global market for Microsoft phones. Nokia's Windows phones are sold under the Lumia brand. Nokia garnered high praise from the investment community when it signed a deal with the world's largest carrier China Mobile.

However, since then the company has stumbled badly in China. Chinese customers had ordered 90,000 of Nokia Oyj's Lumia 920T, but Nokia was only able to deliver 30,000. The phone retails for 4,599 yuan ($738) and most China Mobile outlets don't have the phone.

The China missteps have been so bad that according to Strategy Analytics:

Nokia led smartphone sales in China with a market share topping 50 percent as recently as two years ago, only to let it slip away after ditching its own Symbian operating system in favor of Microsoft's Windows. Local rivals such as Lenovo Group Ltd. and China Wireless Technologies Ltd., as well as giants Samsung Electronics Co. and Apple Inc. have left Nokia with a meager 1 percent share.

By not being able to deliver to China Mobile, it risks setting the company even further back in China. An advantage that Nokia does have in China, however, is that the company has been in China for over 20 years. Over that time Nokia has built up its sales and distribution forces. The company has to now focus on marketing itself better to Chinese consumers.

Nokia, like BlackBerry, has a valuable patent portfolio and has been working to monetize that portfolio. Nokia actually sued BlackBerry for patent infringement and received a one-time payment of $65 million plus recurring royalty payments. Nokia is further aided in the patent wars with its 15 year patent licensing agreement with Qualcomm. It is estimated that out of Nokia's $39.07 billion in revenue, $600 million comes from patent royalty income. This makes Nokia's patent portfolio worth more than BlackBerry's.

In terms of valuation, Nokia has $13.13 billion in cash and debt of $7.25 billion. That leaves $5.88 billion plus an estimated $4 billion for the patents and that gives you $9.88 billion.

At $3.52 per share, Nokia has a market cap of $13.06 billion, you're getting a $39.07 billion in revenues company for only $3.18 billion.

Nokia still has notable shorts interested in the stock, with about 8% of its float shorted (see why Tilson loves Nokia as a short). As well, the company has little hedge fund interest, with its largest hedge owner by shares, Arrowstreet Capital, having dumped over 70% of its shares during the fourth quarter (check out which hedge funds own Nokia).

In the end

What many U.S. investors are missing in the mobile phone market is an understanding of the growth in emerging markets. Nokia and BlackBerry are particularly popular in Africa for their long battery life. In Africa, power is not as easy to come by as in the West and a phone with a longer batter life is necessary. In emerging markets both BlackBerry and Nokia are able to compete aggressively with Apple and Android since both offer cheaper phones.

From a liquidation standpoint, both are undervalued. In terms of business model and execution, BlackBerry is doing a better job and is in control of its own operating system. Nokia is relying on Microsoft instead. More apps are available on the BlackBerry phone than on the Lumia model. For these reasons, I think investors would be better served owning BlackBerry over Nokia.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.