Nokia: You Ain't Seen Nothing Yet

May.30.13 | About: Nokia Corporation (NOK)

Executive summary

I believe Nokia (NYSE:NOK) offers a lucrative long-term opportunity. I am a contrarian investor at heart. I tend to gravitate towards large-cap stocks that are confronted with pessimistic outlooks from most investors. Nokia definitely fits the bill. The stock is currently trading near all-time lows, even lower than the 2009 low and vastly below the high of over $30 in 2008. See the chart below.

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These characteristics are a starting point to finding stocks with hidden value. In the following sections I will discuss the scope of the opportunity, why the stock is underpriced, the downside risks, and why investors may soon change their bearish view on the stock. Nokia is in the early innings of a major turnaround. A majority of market participants have a negative outlook on the stock. Yet, last quarter's results showed the company is on track to profitability. Now is the time to buy Nokia.

Why is everyone so bearish?

Nokia is going through a transition and is currently at the bottom of the cycle. The company was once the industry leader, but was passed over by the likes of Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Samsung (OTC:SSNLF) and BlackBerry (NASDAQ:BBRY). Now, the company is attempting to reinvent itself by one upping the competition on both ends of the smartphone spectrum with a flurry of new product offerings. No one is giving Nokia much of a chance based on the stiff competition.

Nokia is competing in one of the most crowded growth industries. The company's traditional mobile handset competitors are Samsung, BlackBerry, LG Electronics (OTC:LGEIY), Sony (NYSE:SNE) and Motorola (NYSE:MSI). Furthermore, Nokia faces additional competition from Apple and Chinese vendors such as Huawei and ZTE at the low end of the phone market. Nevertheless, I posit Nokia is entering a period where it may have the upper hand. The timing of its most recent offering is most opportune. The potential windfall if the company is successful is not priced into the stock. Furthermore, the company recently suspended the dividend. This has exacerbated the pressure on the stock, driving it artificially lower.

Furthermore, the two heavy hitters in the smartphone market seem to have missed with their latest products leaving an opening for Nokia. Apple's latest entrant, the iPhone5, was poorly received with issues surrounding the screen size and the fact the phone had no revolutionary features. Furthermore, the launch of Samsung's new S IV fell short of expectations as well. The S IV was slammed for merely being incrementally better and did not live up to the hype.

What are the bears missing?

I posit the company is on the cusp of a turnaround. The stock is at an inflection point. The stock just successfully tested long-term support at the $3.00 level. See the chart below.

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The stock has gone on a nice run as of late. This may be due to prescient investors seeing the light at the end of the tunnel. After a very rough 2012, the company is projecting a return to profitability in 2013. There are several factors impacting the bottom line.

  • Transition to the windows phone platform -- Nokia should complete the transition from its legacy Symbian smartphone operating system to the Windows Phone platform very soon. This should vastly improve the customer experience and cut costs.
  • Introduction of Lumia 928 is driving sales-- Nokia has two new flagship phones. The Lumia 928 for the U.S. and the 925 for the rest of the world.

The Lumia 928 was recently released and available with Verizon. Check out this video of the phone. For all intents and purposes, it is the first true flagship Lumia to bear Big Red's branding. The 928 no longer has the smooth polycarbonate unibody of the 920. The shell is more hard-edged and angular, yet still plastic.

  • The success of the Lumia 925 will be the linchpin-- The Lumia 925 is expected out in June and sells for 469 euros. Unlike the 928, available in the U.S. only, this phone is setting its sights on the rest of the world. The Lumia 925 is Nokia's flagship phone for the rest of the world, most importantly Europe. With the eurozone seemingly pulling itself up by its boot straps, I posit the sales of the 925 will beat expectations, lifting the stock.
  • Expectations are extremely low-- The expectations for Nokia are extremely low. This is a key factor in my bullish thesis. It does not matter if the company has a gain or loss, it matters by how much it exceeds or misses expectations. With expectations set so low, I believe Nokia will have no problem besting estimates.
  • The stock is undervalued fundamentally-- Nokia has a price to book ratio of 1.39. The company has $3.62 in cash per share and book value per share is $2.68. See table below.

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Apple trades for three times book value. Google trades for four times book value. BlackBerry trades at a price to book ratio of .81. What is attractive about the valuation is the fact that the company is currently priced based on extremely low expectations. I posit the pessimism regarding Nokia has driven the stock so low that significant value now exists.

  • The technicals say buy now-- There are several technical indicators flashing buy right now. The Moving Average Convergence/Divergence (MACD) indicates a bullish trend. Relative strength is neutral. The Up/Down volume pattern indicates that the stock is under accumulation and the 50 day moving average is rising, which is bullish. These are all signals market participants are starting to take notice of the company's improving outlook and accumulating the stock.

What is the size of the opportunity?

In February, Argus upgraded the stock from Hold to Buy with a twelve month price target of $6. This implies a 60% upside over the next ten months. I have a twelve month price target of $7 over the next twelve months. This is essentially a double.

Conclusion

I believe this stock offers a convincing case to go long. The stock has an asymmetric risk / reward ratio. The stock is trading close to all-time lows. The bears think Nokia has no chance to return to dominance in the market. The flaw in this stance is Nokia does not have to become the industry leader to be successful at this point. The company only needs to recoup some market share to be successful. This stock presents a favorable speculative buying opportunity.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NOK over 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.