Nokia (NYSE:NOK) stock price has been largely static over the past month after going up more than 85% as the company announced the sale of its handsets unit to Microsoft (NASDAQ:MSFT). A lot has been said about what this deal means for Nokia and where the company will use the cash from the deal. However, the most important weapon in the company's arsenal is its patents portfolio in my opinion, and in future, it will be the most important when it comes to revenue growth.
More Revenue from the Currently Leased Patents?
Mobile vendors have requested the regulatory authorities of China to make sure that Microsoft's acquisition of the Nokia unit is not followed by higher patent prices in the future. The companies include Huawei Technologies, a networking and equipment giant, and ZTE Corp. (OTCPK:ZTCOF), another huge mobile manufacturing company. Interestingly, Huawei has made deals with Microsoft to make mobile phones that use windows as the operating system. The Chinese companies are wary that the completion of the sale will result in higher patent costs as the company looks to bolster its revenues. According to Economic Observer, Nokia could make $1.1 billion by leasing the patents in the Chinese market as mobile phone sales by Chinese manufacturers are expected to reach $55 billion next year. This means, Nokia is likely to make this $1.1 billion even if it does not increase the prices of its patents as the licensing fee it charges is 2% of the selling price of the device.
In the third quarter of 2013, smartphone sales worldwide grew by 38.8% since the last year with shipments totaling 258.4 million units all over the world. In this figure, Chinese vendors account for over 33%, making China's share around 82 million units. Nokia is yet to bring Android to the table for patent infringements and I will not be surprised if they win, as they managed to beat Apple (NASDAQ:AAPL). China's mobile market is growing because of its low cost Android based phones. When Nokia decides to go after Android, they could either demand a huge settlement amount or they could demand a percentage from the each software sold. Either way, the company will make substantial amounts of money in case of a successful patent infringement lawsuit against Android. However, the latter would be more profitable for Nokia in the long-term as it would serve as sort of an ongoing royalty to the company.
A Lot More to Come from the Existing Patents
Nokia still has some important patents which it did not start leasing in order to protect their technology. With these patents Nokia has the potential to grow the revenues further. Previously, Nokia tried as little as possible to license its patents when it was manufacturing smartphones. Nokia's patents are extremely valuable and will result in substantial revenues as the company starts to license its technology. Google (NASDAQ:GOOG) paid $12.5 billion to acquire Motorola Mobility, mainly because of its patents. Last year, Nokia made $643 million from licensing just 40 patents - the company still has a large portfolio of patents which it can license in the future to grow its revenues. Moreover, with the smartphones unit sold off, Nokia has better negotiating power in licensing their patents which means they can charge even higher prices. However, this monopolistic power is making the regulatory authorities a little uncomfortable, not just in China, but around the world.
The mobile phones manufacturing segment had become a drag on the company, and the decision to sell was the best in my opinion. Nokia has been an ever changing organization and the company has almost always come off better after making a split. The sale of the handsets division will see the company use its resources in the networking and equipment segment through NSN. Furthermore, we will see greater monetization of its intellectual property. Nokia has not been exploiting its intellectual property properly in the past. However, the sale of the handsets division will allow the company to properly monetize its patents. Furthermore, a more focused approach towards the networking segment will yield larger benefits for the company than its handsets segment. In my opinion, we will see substantial revenue growth for Nokia over the next two-three years, and the price of the stock will continue its gradual rise.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.