The Finnish mobile giant Nokia (NOK) is showing urgency in its product launches as it looks to recapture its dominance in the mobile phones market. Nokia used to be the undisputed No.1 in the mobile market, with a ~40% global market share. However smartphone advances have forced Nokia to become a fringe smartphone player as Samsung (OTC:SSNLF) and Apple (AAPL) have almost entirely captured the market profits. But Nokia is making rapid advances in 2013 with its Windows 8 Lumia phones selling well in almost all the markets. In fact, Lumia shortages have been reported in a number of places. I think it's a good sign (instead of a bad one) as the sales are more than what the management had anticipated. I think that Lumia 520/521 is one of the best smartphones in the market at the current price. Nokia's stock has been hovering at the mid $3 dollar level for quite some time now. The company is all set to come out with a revolutionary new imaging phone Window 8 EOS PureView in the next month, which might help the company pull ahead from the rest of the me-too Android smartphone players. The company also might sell its 50% stake in the Nokia-Siemens JV, which could also act as a big positive catalyst for the stock.
Catalyst 1: New Imaging Phone
Nokia phones are known for their better quality imaging as compared to other smartphones. The company was the first to incorporate high quality Swiss Carl Zeiss lens in its smartphones. The company had introduced an 808 Pureview smartphone. However, the smartphone did not set the world on fire as it was based on the Symbian operating system, which the company has abandoned. Nokia is now coming out with a new Pureview flagship based on the Windows 8 operating system. This smartphone will have the best imaging capability for any smartphone with its 41 MP camera. The other features of this smartphone will also be comparable with the other high-end Lumia smartphones, making it highly attractive as a replacement for standalone cameras. Digital cameras have been facing a tough time due to substitution by smartphones, as casual camera users are satisfied with their phone cameras. Now even the mid- to high-end camera enthusiasts might move to smartphone only buyers, as the high-end imaging capabilities of the Pureview smartphone makes it equal to DSLR cameras. This smartphone has the capability of becoming a major blockbuster smartphone for Nokia (something like a Motorola Razr).
It seems Nokia is finally gearing up to release a version of the Lumia 920 with the 808 PureView's 41-megapixel camera, dubbed the Lumia EOS. You might think that 41 megapixels is overkill for a smartphone camera - even the best Canon DSLRs have less! - but take a look at the sample photos below and then let me know if you still feel the same way. On the hardware side of things, this new Lumia 920-PureView mashup, preliminarily dubbed the Lumia EOS, will presumably have similar internals to the Lumia 920, 925, and 928 - i.e. a dual-core Snapdragon, a 4.5-inch 1280×768 display, and 1GB of RAM. And then there's the camera.
Source - ExtremeTech
I think that the market leader Samsung realizes that the PureView smartphone could create a big problem for its smartphone business. The company has introduced a camera focused variant of its S4 smartphone, which will have better imaging capabilities. However, I think that Nokia's EOS has a far superior imaging capability than S4 Zoom.
Catalyst 2: Nokia- Siemens JV stake sale
The Nokia-Siemens telecom equipment JV has been hurting for some time like other western telecom equipment companies. However, the JV's renewed focus on 4G technology and cost cutting has allowed it to return to positive operating margins. Siemens (SI) is looking to exit this segment and is examining various possibilities. It was reported in WSJ that Siemens has already invited some of the heavyweight Private Equity groups such as Blackstone to negotiate on the sale of its stake. The report also mentions that Siemens is looking at the possibility of doing an IPO as well. Note Nokia has not been too keen on selling the JV, as it is still in the early phase of a successful turnaround. However, going with it alone in a highly competitive telecom equipment business might not make sense. Nokia is not financially well positioned to buy Siemens' half of the JV and would probably also sell its own stake. This would be good news for Nokia in my opinion as it will help focus the company's energies on its core mobile phone business. This will also substantially bolster Nokia's balance sheet by almost doubling its net cash. This sale might lead to a flare up in the stock's price as investors better appreciate the company's strong asset position.
Siemens officials over the past few months have been fairly vocal in their desire to get out of their 6-year-old joint enterprise networking venture with smartphone maker Nokia. Now the company seems poised to act on that desire.
Siemens officials are talking with private equity firms about possibly buying Nokia Siemens Networks, according to a June 14 report in The Wall Street Journal. Citing unnamed "people familiar with the matter," the newspaper said Siemens has talked with such firms as TPG, Blackstone Group and KKR about buying the entire joint venture, which some analysts have that-if it were a public company-could be worth as much as $9.36 billion. A less likely possibility would be selling Siemens' part of the joint venture, according to the Journal's sources. A third option, if no deal to sell all or part of the company is reached, would be an initial public offering (IPO), according to reports, which could help it quickly generate a lot of money.
Source - eWeek
Nokia has net cash of almost ~$6 billion on its balance sheet, which is more than 40% of the company's current stock value of ~$3.6. A complete sale of the JV (valued at ~$9.3 billion) will increase Nokia's cash position to more than $10 billion, which would make up ~70% of the company's current market capitalization of ~$14 billion. I think that the stock will not remain so undervalued in such a case and should see a substantial rise in Nokia's stake sale.
Nokia Group ends first-quarter 2013 with a strong balance sheet and solid cash position. Gross cash was EUR 10.1 billion and net cash was EUR 4.5 billion. - Nokia Group strengthened its net cash position by approximately EUR 120 million sequentially. Nokia Siemens Networks contributed approximately EUR 210 million to the Nokia Group net cash position.
Source - Nokia
Stock Price and Valuation
Nokia has been trading in the mid $3 dollar range for the last 2 months. Nokia's valuation is quite cheap with a P/S of 0.3x and P/B of 1.1x. I think that the stock is well positioned to see a sharp stock price rally if the two catalysts pan out as I envisage. The company is woefully cheap if you do a sum of the parts valuation (feature phone business, Lumia business, patents, NSN JV, imaging business etc.). I think that the company will report good sales and profits as its Lumia smartphones are seeing shortages in a number of places due to strong demand. Nokia is introducing new products and services, which are helping it stand out in the smartphone market. I think that the stock is all set to go higher as the company shows improving Lumia shipments in the coming quarters.
Nokia is fighting against a whole host of strong competitors in the burgeoning smartphone market. Cheap hardware components and free Android OS have created an army of small nimble competitors. However, Nokia is differentiating itself smartly through Windows 8 OS and features like the 41 MP cameras. The sale of its 50% stake in the NSN JV can act as an additional catalyst for the stock. The Android market is getting crowded with Sony (SNE), Panasonic, Samsung, LG etc. all trying to gain an edge. Nokia made a very painful decision to abandon its market-leading Symbian OS. I think most of the pain is behind the company now as it uses its mobile strengths to make a strong comeback. Nokia's current stock price and valuation are quite depressed and the stock offers a good risk reward profile in my opinion.