The past week saw quite a few developments in the mobile sector. BlackBerry (BBRY) announced that it is exploring strategic alternatives to maximize shareholder value, including a possible sale of the company. Nokia’s (NOK) Lumia momentum seems to be continuing in Q3 with the low-end 520, which has become the most popular Windows Phone by gaining about 9 percentage points in WP8 market share in the last month itself. Meanwhile, Apple (AAPL) continues to trade around the $500 mark, having gained almost 20% in the past month on bullish investor sentiment surrounding a possible China Mobile (CHL) deal and the announcement of new products in the coming months.
After months of underperformance, Apple’s shares have received a fresh infusion of life lately. Rising from a low of about $400, Apple’s stock has appreciated almost 25% in less than two months. It is now trading close to the $500 mark – a level that was last seen in January this year. Most of the recent run-up (more than 10% in the last week alone) has however happened on the back of a couple of tweets by legendary investor Carl Icahn, who said that he has taken a large position in Apple. A number of recent filings by noted hedge funds, such as those run by George Soros and Leon Cooperman, also showed that institutional interest in Apple’s shares has been picking up amid growing speculation about Apple’s future product launches.
While most of the exuberance seems to be driven not by a change in fundamentals but investor sentiment, it doesn’t change the fact that Apple’s shares were extremely undervalued for a long time. Even at $500, we estimate that the stock is trading at a discount of about 20% to our $600 fair price estimate. Moreover, our price estimate doesn’t take into account any new product categories such as the iWatch and iTV, which may be launched in the coming months and could add even more value. Considering just the iPhone, on which rides almost half of Apple’s value by our estimates, there is immense value to be captured in the emerging markets where Apple is still a fringe player but has a very high brand strength. The introduction of a low-cost iPhone and a possible subsidy deal with China Mobile for the same could help Apple realize a lot of that potential in the coming years. (see Apple Has A $45 Billion Opportunity If China Mobile Deal Materializes)
Nokia’s low-end expertise seems to be working wonders for the Lumia 520. In the past month, the Lumia 520 has increased its market share of the overall Windows Phone 8 installed base from 18% to 27%, according to recently released data from AdDuplex. The 520′s strong demand helped Nokia increase its share of the WP8 market to almost 87%, ensuring that Microsoft’s mobile fortunes are tied closely to its own. The data shows that the momentum that Nokia had generated at the low-end in Q2 is continuing this quarter as well. Most of the demand seems to be coming from emerging markets such as India where the Lumia 520 has already captured as much as 36% of the WP8 market. While the Windows Phone market may currently be very small, it is rapidly gaining momentum and has already displaced BlackBerry as the third smartphone ecosystem of choice.
Nokia’s fortunes in the emerging markets have taken a hit as feature phone sales increasingly face the brunt of increased competition from cheap Android smartphones. But the success of the Lumia 520 could help offset some of that pain in the coming quarters. However, just as we saw last quarter, a higher mix of sales of the lower-end smartphones could put pressure on ASP levels and possibly margins as well in the coming quarters. Nokia has however had a lot of experience selling low-end mobile phones at a profit, and playing the volume game is what the Finnish handset maker is known for and is best at. Last quarter, despite selling more of the low-end smartphones and continuing to see a rapid decline in its feature phone business, Nokia managed to almost break-even with operating margins of about -1%. Moreover, the bigger issue at hand is the lack of a strong app ecosystem around Windows Phone that would draw in both developers and users alike to the fledgling platform. Building a critical mass of Windows Phone users is therefore paramount to Nokia’s future prospects, and the 520 is playing a critical role in that process. (see Nokia’s Low-End 520 Momentum Crucial For WP Ecosystem Development)
BlackBerry’s days as an independent public company may soon be over. With sales plummeting amid growing smartphone competition and BB10′s launch not helping much, the beleaguered handset maker announced Monday that it has formed a special committee to explore “strategic alternatives”, including a possible sale of the company. It is also likely that one of the board members, Prem Watsa, who resigned from BlackBerry’s board citing a conflict of interest, could be interested in taking the company private and turning it around away from the prying eyes of the public. Prem Watsa is currently the chief executive of BlackBerry’s largest shareholder, Fairfax Financial Holdings. Apart from Fairfax, it is not yet clear who the other suitors are but it is likely that BlackBerry would draw the most value when broken away and sold in parts.
While BlackBerry’s patent portfolio could interest a number of buyers, what could be the most lucrative for a player in the smartphone industry is BlackBerry’s secure enterprise network. With the high-end smartphone market getting saturated, companies such as Samsung are looking to strengthen their enterprise offerings and diversify their revenues away from retail. Relationships with enterprises are generally more stable than consumers, as can be seen with BlackBerry whose high-margin Push Email service business continues to be profitable amid slumping hardware sales. By our estimates, the Push Email business is BlackBerry’s most valuable (more than 30% of our $12.50 price estimate) and cash-generating asset right now, and continues to be the gold-standard when it comes to enterprise security and solidity of service.
Disclosure: No positions