Nokia (NOK) is based in Finland and accounts for 1.6% of GDP, 20% of exports (forestry and Finlandia Vodka account for the rest), over 50% of the stock market capitalization and over a third of all research and development spent in this small Nordic country. During the past 260 week period Nokia stock traded from a high of $40 to a low of about $4.50. It is currently hovering between $5 and $6 per share.
I believe that Nokia is significantly undervalued at current price levels and that its stock price could double in the next few years. While many investors are fretting about its lack of profits and a decrease of the dividend payment to euro 0.20 per share (approx. $0.27), Nokia is still going through a major reorganization and 2011 was a pivotal year for the company.
In my opinion, Nokia will be able to rebound in the next five years for several reasons. First, it recently entered into a partnership with Microsoft (MSFT) for its smart-phone software. Second, its Siemens (SI) network partnership will start generating profits in the next year. Third, it invests heavily in R&D. And finally, because Nokia has a leading position in emerging markets where the iPhone and Android smartphones are still out of reach for the majority of the population. For example, Nokia is the leader in Africa due to the company's commitment to offer budget handsets and low-priced smart phones. At current price levels, Nokia provides a good entry point into and an exposure to the booming mobile communications area.
Nokia has about 3.83 billion shares outstanding, a market capitalization of about $20 billion and an enterprise value of about $12 billion (it had $15 billion in cash and $5 billion in long-term debt as of December 31, 2011). The company had a positive free cash flow in the past 3 years and its current price to tangible book value is 1.3 compared to 4.2, 7, and 4.7 for the industry, sector and the S&P 500, respectively. Its price to sales valuation is even more favorable with a price to sales ratio of 0.4 compared to 2.5, 2.4, and 1.3 for the industry, sector and the S&P 500, respectively. Looking forward, Nokia will start repurchasing its shares after its board of directors approves a 360 million shares buyback in May of 2012 and achieve a long-term operating margin of over 10% for its device and services and 5%-10% for the Nokia - Siemens network part of its business. Assuming Nokia generates $40 billion in revenue in 2012 with $25 billion and $15 billion for Service and Devices and Nokia Siemens Network, respectively, and a 25% tax rate, I estimate earnings of about $2.7 billion on a long-term basis giving price to earnings ratio of 7.4 compared to a price to earnings ratios of 23.1, 18.4, and 15.2 for the industry, sector, and the S&P 500, respectively. Clearly, Nokia stock will have to double in the next few years to catch up with the averages as it returns to a normalized profitability.
Nokia business units are currently going through a reorganization which should be complete by the end of 2013. It is estimated that the company will save over $1 billion and will have significantly lower head count. In its Nokia-Siemens network segment, it will focus on LTE, broadband and services. As part of this strategy, in the beginning of 2011, Nokia sold 450 patents to Sisvel, an Italian based patent holding company, but it kept the license to use these patents. Later in April of 2011, it acquired Motorola Solutions, the networking arm of Motorola. While Nokia has been successful around the world, the U.S. has been its Achilles' heel. This acquisition together with the Microsoft alliance give the company a stronghold in the largest economy.
The device segment went into a partnership with Microsoft which was announced in February of 2011. According to the agreement, Nokia would pay a license fee to use Windows software on its phones and receive quarterly platform support payments from Microsoft. Nokia received the first such payment in the amount of $250 million in the fourth quarter of 2011. As part of the repositioning, the company will stop selling smart phones with its own Symbian platform by the end of 2016. The Lumia series of mobile phones, which carry the Windows operating system, are already offered in the U.S. and the flagship Lumia 900 will debut on the AT&T network in April. I expect Nokia to introduce soon a notepad based on Windows 8, which Microsoft is releasing in the Fall. What will differentiate Nokia from other Windows smart devices is its location and commerce capabilities brought by the 2008 acquisition of Navteq. Nokia location and commerce will integrate nicely with Microsoft's Bing search engine and AdStart platform. In a recent interview, Steve Overman, stated that the location-based services will be a focus in the new marketing campaign giving City Lens app as an example, which will allow users to find places of interest through the camera viewfinder.
According to market research firm IHS iSuppli, the Windows operating system will grow from a 2% market share of the operating systems now to 16% in 2014 and Nokia will hold about 50% and 62% share of the Windows phones sold in the U.S. in 2012 and 2013, respectively, with share starting to decline after 2014. A Google executive commented on the Nokia - Windows partnership that "two turkeys do not make an eagle". While Nokia and Microsoft are losing market share to competitors, I think anyone who calls these two companies turkeys is completely wrong.
It will not be a surprise if Nokia divests its Vertu luxury handset brand in the near future. While Nokia is selling non-core businesses and patents it is keeping over 10,000 patent families that it developed by spending $45 billion in R&D since the early 1990s and collaborating with universities around the world. Currently, Nokia is developing a number of disruptive technologies such as high definition positioning for indoors and kinetics capabilities in addition to superior voice and touch. Also, Nokia was one of the creating partners of the near field communications (NFC) technology and most of its phones are NFC enabled giving it an edge in this relatively new area of smart device application.
Nokia is reinventing itself. Android and iOS phone systems have a head-start but the current reorganization this Finnish company is undergoing is promising. Nokia is quickly catching up and it recently partnered with Service2Media, a company which among other things allows developers to easily create applications for different operating systems. Nokia's location based services is comparable to Google (GOOG), its Microsoft partnership will allow the company, among other achievements, to enter the enterprise area, where Microsoft is already established leader, in direct competition with the BlackBerry maker Research in Motion (RIMM). The Nokia-Siemens network is well-positioned to offer a range of products and service for the overdue network upgrades worldwide. Given all this, I believe at current prices, Nokia stock is a solid investment with a potential to double by the end of 2013.