Microsoft (MSFT) struck an unbelievably great deal with Nokia (NOK) last week. Yet its stock price corrected ~3% in the last two trading sessions. Although a two year transition period may disappoint some hoping for a faster ramp up, it’s hard to see how this agreement isn’t positive for MSFT's stock (particularly given the low sentiment). Here are the three big positives for MSFT from the deal:
- A market share gain opportunity for WP7 which MSFT couldn’t have achieved on its own: In 2010, Nokia controlled 37.6% of the global smartphone market while Windows had a 4.2% market share. Even assuming some market share loss during transition, WP7 could easily have around a 1/3 share in 2013, putting it on par with market leaders. Assuming the per unit royalty rate of $15 and a market size of 800 mn units in 2013, a 1/3 share of WP7 would mean ~4 bn in revenues.
- A deal for Bing, which could raise its market share in mobile search to a level on par with leaders: The deal brings about 570m Nokia users to Bing mobile search, increasing its market share to ~31%. The opportunity is potentially worth $1.25b (top line) in the first year, and given the growth rate in mobile search, it could easily multiply several times in the next 5 years.
- Probability of a large mobile acquisition by MSFT is now remote - a negative catalyst removed. Given MSFT’s failure to gain significant share even with a much improved mobile OS (WP7), investors were concerned that it could land a big acquisition (NOK or RIMM) over the next 12-18 months. Given the scope of this partnership, such a scenario now appears unlikely in the medium term. This removes a potential negative catalyst.
In addition to the above mentioned point, the partnership potentially signals a paradigm shift in thinking at Microsoft. It implies that WP7 is becoming more flexible in relation to OEMs which could further accelerate adoption and market share gains. This deal is much better than a NOK/RIMM purchase, which would be expensive, take longer to integrate, bring risk and perhaps disrupt relationships.
Given all these positives, the negative stock reaction of MSFT's stock in the last two trading sessions is a bit surprising. I expect MSFT to reverse its losses going forward in the near term. With options expiry coming next week, traders can also consider buying near/in the money call options.