In my article "The Nokia Problem Remains Broadly The Same But There's Some Hope" I explained my thesis that for all purposes Nokia's (NOK) "Devices and services" segment was being valued at less than $0, which made the stock a good bet at $3.20:
Still some value
At the same time, it looks as if Nokia still has some value in its HERE segment (location services) and in the Networks segment. HERE looks to be around a $1 billion euro per year business, and Networks might be as much as a 12 billion euro per year business. Both should have positive margins.
If we speculate on ongoing operating margins of 12% for each of these businesses, a 30% income tax rate and apply a 15x multiple to the resulting net profit of HERE and 10x to the Networks segment, this would give us a value of 1.3 billion euro for HERE and 5.0 billion euro for the Nokia Siemens Networks (already discounting the fact that Nokia holds just half of it).
Since Nokia also has a net cash position of 4.5 billion euros, this means that we can readily justify 1.3+5+4.5 = 10.8 billion euro or $14.1 billion of Nokia's value. Nokia has around 3.711 billion shares outstanding, so at the $3.20 it currently trades, this gives it a market capitalization of just under $12 billion. In short, the "Devices and Services" segment is being carried at less than zero value.
Now that Microsoft (MSFT) has sprung forward to buy this "valueless" division, it makes some sense to re-visit the stock and these assumptions.
The situation now
Nokia made two moves:
- One was to buy out Siemens from its Nokia Siemens Networks for around $2.25 billion.
- The other was to sell its devices and services division plus a licensing of its patent portfolio to Microsoft for $7.2 billion.
This leaves Nokia with 100% of the Networks segment as well as with its HERE subsidiary. It should also leave it with around $10.4 billion in net cash after all is said and done.
Now, redoing the same logic, which we applied at $3.20, and using a EUR/USD rate of 1.33, we get:
- Assuming ongoing operating margins of 12% for Networks and HERE, a 30% income tax rate and applying a 15x multiple to the resulting net profit of HERE and 10x to the Networks segment. This gives us a value of $1.73 billion for HERE and $12.5 billion for Nokia Networks.
- Assuming a net cash position of $10.4 billion. This means that we can readily justify $1.73+$12.5+$10.4 = $24.6 billion of Nokia's value. Nokia has around 3.75 billion shares outstanding, so this gives us a value per share of $6.56.
As I write this, NOK is trading at $6.50. The full value we can get, with some optimistic assumptions regarding margins and valuation, is $6.56. As such, Nokia looks fully valued here.
While at $3.20 the market seemed to be valuing Nokia's "Devices and services" segment at less than $0, after Nokia bought out Siemens from its "Networks" segment and sold "Devices and services" to Microsoft, the situation has changed.
Nokia did gain value in realizing the sale to Microsoft and also in buying back its share of Networks below our assumptions. Still, the move in Nokia's share price was so large that today we can say that it's fully valued at $6.50, and thus no longer a buy.
It should also be stressed that this valuation is quite optimistic in giving the Networks segment a value of $12.5 billion whereas the Siemens transaction took place at a value of just $4.5 billion. This highlights the optimistic assumptions I'm taking here, while still reaching a value that's only equal to what the market already trades for.