Nokia's Patents Might Not Be Worth What You Think

| About: Nokia Corporation (NOK)

Summary

Nokia's recent license arbitration agreement with Samsung disappointed the market.

It seems the market had greater expectations that did not ferment. As a result, Nokia's stock has been downgraded by every analyst under the sun.

However this might also mean that Nokia's patent portfolio is not worth what many think.

It seems the market had great expectations from the recent Nokia (NYSE:NOK) Samsung - (OTC:SSNLF) patent license arbitration, and those expectations did not ferment.

It now seems obvious to me the market was partially modeling Nokia's future performance based on what it thought would be the outcome of this arbitration.

Nokia's announcement reads:

Including this award, Nokia expects Nokia Technologies to report net sales of approximately EUR 400 million in the fourth quarter 2015 and approximately EUR 1 020 million for the full year 2015. These numbers include catch up revenue because the award exceeded revenue estimates already recognized with respect to the period from January 1, 2014 through September 30, 2015. Consistent with Nokia's outlook, Nokia Technologies net sales for the full year 2015 are expected to increase year on year, even after excluding amounts related to the award. Following the award, as of the end of the fourth quarter 2015, the annualized net sales run rate for Nokia Technologies was approximately EUR 800 million.

Sounds good, however Canaccord Genuity's Mike Walkley had this to say (via Barron's):

We had anticipated a better outcome for Nokia in this arbitration process. Following the award with Samsung, Nokia's annualized Technologies division revenue run rate is approximately €800M or well below our €1.2B expectation, as we had anticipated the Technologies business would deliver materially larger and higher- margin licensing revenue longer term with the Samsung arbitration resolved. While we remain positive the now-closed Alcatel-Lucent acquisition can deliver its €900M cost synergy target by 2019, these assumptions are included in our updated model. However, due to our materially reduced licensing forecasts, we are lowering our estimates, resulting in our price target decreasing to $6.50.

So in other words, at least some analysts had expected a lot more than what Nokia got. And if the above expectations of 1.2 billion euros were widespread among analysts, then it is only natural that Nokia dipped to $6 a share recently.

The question is, why were so many analysts modeling so much more than Nokia got? Why was everyone so wrong?

Florian Mueller (for which I have a lot of respect) from the Foss Patents blog tells us that:

While these two parties have so far been able to avoid going to court against each other, the above passage does mean that litigation (in the event they fail to reach an agreement) is still a possibility.

Nokia is the worst patent holder in this industry with respect to privateering. I've raised that issue in a couple of posts (see 1, 2). The fact that having a license from Nokia itself doesn't mean you couldn't still be approached by dozens of other entities monetizing Nokia patents probably makes negotiations between Nokia and potential licensees a lot harder than those talks used to be years ago.

The fact that most of Nokia's patent assertions against HTC failed (though HTC ultimately felt forced to take a license on whatever terms) may also make prospective licensees feel they should take their chances in court.

The next Nokia-Samsung announcement, whenever that one may issue, will most likely be a "fish or cut bait" statement. They won't be talking forever. At some point they will agree or Nokia will sue. I, for my part, would recommend to Samsung (if they asked me, which they obviously don't) not to overpay.

So what is a patent privateer? Wikipedia tells us:

A patent privateer or intellectual property privateer is a party, typically a patent assertion entity, authorized by another party, often a technology corporation, to use intellectual property to attack other operating companies.[1]:5 Privateering provides a way for companies to assert intellectual property against their competitors with a significantly reduced risk of retaliation and as a means for altering their competitive landscape.

Might be this the reason why the market was so wrong? Is Florian Mueller right, that "Nokia is the worst patent holder in this industry with respect to privateering?"

Honestly I do not have the answer, but it does explain how Canaccord Genuity's Mike Walkley was so wrong with respect to how much Nokia might milk Samsung.

And if that's the case, then that explains why most analysts were probably wrong with respect to the future revenue potential of Nokia's IP Technologies division.

As a result, just about every analyst under the sun has downgraded Nokia's stock (search "Nokia Downgraded" because downgrades are just too many to mention).

And like I have said before, if a stock is not a buy on Wall Street then it is a sell. And taking into consideration that the price target for Nokia's stock has been marked down as low as $6.50 per share, then Nokia's stock might dip well bellow $6 a share. For as we all know, the market always overshoots both to the upside and the downside.

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