The Nokia/Microsoft Saga that has unfolded over the past four weeks has sent shockwaves throughout the investing, technology, and Finnish community. The swift, some would argue inexpensive, acquisition by Microsoft (MSFT) has left many wondering what a phoneless Nokia (NOK) would look like, and questioning how profitable their remaining operations will be. Most commentators, including myself, have poured their focus towards Nokia's patent portfolio, Here Maps, and Nokia Solution Networks. While I understand that these three divisions are imperative to the ultimate success of Nokia as a whole, I believe there are many more crucial layers to Nokia's stock price appreciation that must be addressed, including an impending dividend reinstatement, and the inevitable return of Nokia branded smartphones, which will give Nokia the chance to regain their spot as the number one phone manufacturer in the world.
Not too long ago, Nokia paid a dividend. Seems like ages ago, doesn't it? It's been ten months since Nokia suspended their quarterly dividend, which was the first time in 143 years. The suspension of Nokia's dividend was a necessary move that helped buy Nokia more time to return to profitability.
The suspension drove away many dividend-oriented investors, and drove down its stock price, with shares falling more than 9% after the announcement was made. At the time, Nokia was inching towards the edge of profitability, and their mobile devices division was burning a large hole in their pocket every single quarter, spooking many analysts and credit rating agencies.
Fast-forward ten months, and Nokia's divestment of their profit burning division has resulted in a cash infusion of more than $7 billion. Once the deal is approved, Nokia will have more than $20 billion is gross cash, and will be sitting on more than $10 billion in net cash. Group this together with the expected 7%-11% operational margin of Nokia Siemens Network, and expected annual cash flows of more than $1 billion from Nokia's patent portfolio, and the likelihood of a reinstated dividend seems stronger than ever.
Nokia managed to go from rags to riches in the matter of a handshake, turning into a miniature cash cow overnight. It only seems likely that Nokia rewards its shareholders for holding on through the thick and thin with either a special dividend, a reinstated dividend, or both. I believe both will occur. From Nokia's announcement presentation, it states, "After the evaluation (of Nokia's future strategy) is complete, deemed excess capital is planned to be distributed to shareholders." Any such announcement from Nokia would result in a surge in Nokia's share price, possibly similar to the amount shaved off when it was suspended, 9%. A reinstated dividend would bring back dividend-oriented investors, attract new ones, and reaffirm the positive outlook for Nokia as a whole.
The Earnings Report: Why Lumia Sales Are Crucial
Nokia's upcoming earnings report on October 29th will shed an extreme amount of light on Nokia's remaining divisions and management's vision for the future and strategy for the company. However, a lot of potential in the earnings report lies within Nokia's Lumia sales. The company moved 7.4 million Lumia units last quarter, and with the Lumia 1020's extensive marketing campaign and associated 'halo effect,' new iterations of low entry phones (Lumia 625), an almost 10% market share in Europe, and recent product releases in the Chinese market, I would not be surprised to see more than 10 million Lumia units being sold. This would be a big surprise to most analysts and investors, and would lead many to question the metrics behind the Microsoft/Nokia deal, and who was actually getting the short side of the deal. A strong uptick in Lumia sales and profitability of Nokia's phone division would result in a lot of pressure from Nokia shareholders to see an increased take out bid, which would result in a strong surge of Nokia's share price. A profit warning from Nokia in the coming weeks would be a step in the right direction.
The silver lining is that if Lumia sales disappoint, it should have a minimal effect (if any at all) on Nokia's share price, and will soon become Microsoft's problem. The risk/reward scenario is extremely favorable for Nokia shareholders going into earnings.
2016: Everybody Loves A Comeback Story
Nokia will be having a grand celebration on December 31, 2015, and not just for ringing in the New Year. Nokia will once and for all be able to remove the shackles that were imposed on them by Microsoft under the terms of their agreement. The ability to begin producing and selling Nokia branded phones, running Windows Phone, Android, or both after December 31, 2015 will present a booming opportunity for Nokia. Nokia's impending two-year break from the smartphone market will give the company plenty of time for reflection. Reflection and development. Nokia has two years to learn from their mistakes and right their wrongs, and the potential comeback could be massive. If Nokia can retain a hardware team to still dream up sleek, solid, and innovative phone models, then Nokia will become a behemoth in the industry once again, reclaim their spot as the number one phone manufacturer, and give Apple (AAPL) and Samsung (SSNLF.PK) a run for their money. With both Samsung and Microsoft setting up shop in Finland, I don't think it will be difficult for Nokia to scout the necessary talent.
The thought of Nokia selling both Windows Phones and Android devices alone justifies a stock price higher than $6.70 in my opinion. Add on a massive patent portfolio, Here Maps, NSN, and a boatload of cash, and you're talking about a stock that should be valued more than double what it is at today (and that's extremely conservative). For the next two years, Nokia can focus its efforts towards profitability and growth with its three business divisions, while Microsoft works on, develops, and grows the Windows Phone platform. Come 2016, the Windows Phone platform will feature a more robust ecosystem, with a much larger user install base than today. Microsoft is doing all of the dirty work, and Nokia will be back when Windows Phone at its height, with the ability to release a new phone line up and directly compete against Microsoft and other Windows Phone vendors.
Nokia's possible re-entry into the phone market should be in the back of every shareholders' head. Though two years sounds like an eternity from now, the true effects of a new, profitable Nokia phone division that runs both Android and Windows Phone is unfathomable at the moment, yet the date is just around the corner.
Join The Party Alcatel
Rumor has it that Nokia is considering a tie up with Alcatel Lucent (ALU), either in the form of a Joint-Venture, or through an outright acquisition of Alcatel's wireless unit, which the company has been trying to sell ever since Michael Combes unveiled his turnaround strategy for the company back in June. Nokia's board has been pondering a tie up with Alcatel since as early as 2012. Nokia Solutions Network would have a combined market share of 25-30% if they acquired Alcatel, and would be a formidable competitor to the industry leader, Ericsson (40% market share). This hypothetically combined company would have received almost a quarter of China Mobiles' latest $3.2 billion contract offering for TD-LTE base stations.
The synergies between NSN and Alcatel are present, as is the likelihood of such a tie up creating long-term shareholder value, though different technological equipment and networks would prove to be challenging for the new company to integrate and would threaten the effectiveness and efficiency of the company throughout the beginning stages. Also, with a recent stock price appreciation of almost 45% since the Nokia/Microsoft deal was announced, it may be a bit pricey and too soon for Nokia to acquire Alcatel. But if Nokia is able to strike a deal with Alcatel's wireless infrastructure for the right price, then the long-term outlook of NSN and Nokia as a whole gets stronger, and should help move the needle for Nokia's bottom line.
Nokia has a bright future to look forward too, yet there are still some risks every investor should consider, however small they may be. Firstly, Nokia is still in dispute with the Indian government over a tax bill for more than $300 million in income. Indian authorities have recently frozen some of Nokia's assets, including their bank accounts in the country. If Nokia is unable to settle this tax dispute with India in a timely manner, it may cause a delay in Microsoft's acquisition of the company, and Indian officials, who are desperately searching for taxable income, may play hardball with Nokia and Microsoft. Any delay in the merger between Microsoft and Nokia is a risk to current Nokia shareholders and would mostly result in a drop for Nokia's share price.
The upcoming shareholder meeting on November 19th may cause negative pressure on Nokia's stock price if shareholders disapprove the merger. This is highly unlikely, yet very possible, especially if Nokia surprises with Lumia sales. If Nokia shareholders do not approve of the Microsoft deal, then Nokia will receive a termination fee from Microsoft and Nokia will be required to pay Microsoft more than $100 million.
Lastly, if Nokia does go through with a merger between them and Alcatel Lucent, I'd expect to see negative pressure on Nokia's share price in the short term. The deal, which would be sweet for Alcatel Lucent, would require a lot of capital from Nokia, and many investors would challenge the feasibility and rationalization behind a merger between the two. While I believe in the long run a tie up between the two companies would create tremendous shareholder value for Nokia shareholders, it may take time for the company and its share price to experience the positive effects of such a merger.
Although Nokia has rocketed almost 70% since the buyout announcement, it's not too late to open a position in the company. There are simply too many positive catalysts that can substantially drive the share price higher, and recent analyst upgrades are only increasing Nokia's momentum. Following the uptrend pays off, and Nokia has a lot more room to climb. Plenty of investors think so as well, with a lot of high options volume occurring recently. On Thursday, October 3rd, Nokia saw an increase of 168% in trading of call options, with investors acquiring 12,085 call options. The next day, Nokia call options saw an increase of 271% in volume with investors acquiring 20,229 call options. This activity is startlingly similar to the unusual call option volume that occurred just prior to the announcement of the Microsoft/Nokia deal. Investors who have a long-term mindset should be opening a position in Nokia at these levels, there are too many positive catalysts to ignore this stock.