Nokia (NOK) is a multinational telecoms company, founded and based in Finland. Between 1998 and the start of 2012, it was the largest mobile phone seller, however, it has recently lost its place as the number one seller to Samsung (SSNLF.PK). It has suffered particularly in recent years due to the rising use of smart phones such as Apple's (AAPL) iPhone. Since February 2011, Nokia has pursued a strategic partnership with Microsoft (MSFT) which has led to all Nokia smart phones running Windows operating systems.
Nokia has seen declining use of its phones over the past few years as it is losing out to smart phone makers. Therefore, it is attempting to exploit this market using its strategic partnership with Microsoft. This will help drive its market share along with Nokia's attempt to strengthen its portfolio of higher end phones. It is also attempting to capture the volume and growth in emerging markets. 2012 is a particularly exciting year for Nokia because it is producing very different and new products which will run Windows 8, and it is also moving into direct competition with Apple and Google (GOOG). Nokia also has various other strategic alliances which will benefit it. The Nokia-Siemens joint venture provides important synergies and economies of scale.
Success of the Lumia 900
The Lumia 900 has generally been regarded as a great success for Nokia. The phone has regularly been in the Top 10 list on Amazon for sales, often reaching number one as well. The extraordinary thing is that this is only the Nokia Lumia 900 black, the other popular colors are Cyan and White, although there are a variety of other colors. Therefore, its reception in the U.S. has been remarkable, especially considering that it is only selling at AT&T (T) and does now sell at the other carriers such as Verizon and Sprint. The phone also ships to China in June so this should provide a huge boost to Nokia's bottom line.
It should not be underestimated how important the strategic partnership with Microsoft is. Nokia up until now has lacked a powerful operating system to run on its machines and this has left it at the mercy of Google and Apple. However, now, Nokia intends to release a Windows 8 tablet by the end of the year and its new phones will run Windows 8. Also, Microsoft will provide Windows 8 for existing devices as well. This will make Nokia's phones much more attractive to potential customers. Nonetheless, it is important to note that Windows 8 might not be a huge success, however, if it is, it will likely transform Nokia and investors in Nokia will be handsomely rewarded.
Rich patent portfolio
Perhaps the most attractive thing about Nokia is its rich patent portfolio. Nokia gets more than half a billion dollars from its portfolio in royalties and it plans to increase royalties to over one billion dollars. It is important to note that many companies have to pay Nokia royalties. For example, Apple has to pay Nokia for each iPhone sold, something which should be taken into consideration. Nokia's dominant intellectual property rights also create potent barriers to entry especially in WCDMA technology. It has recently said that it intends to exercise its rights over its intellectual property, and will enforce its rights more than it has before.
Nokia's current value is mind-boggling. It is one of the most undervalued stocks I have ever seen. Nokia's share price peaked at $40 in 2007 before declining to just $2.63. Part of this has come from Nokia truly losing value, however, most of it has come from consumer idiocy. Consumers have got too attracted to Apple and Google and have ignored smaller but better deals. Nokia's current market capitalization is just $9.77 billion. It is worth more than $10 billion just from its share of the mobile market, in fact is worth significantly more if judged on a similar standard to Apple. On top of this, Nokia has compelling fundamentals, a solid cash flow, and an attractive balance sheet. Its metrics are a very attractive picture for potential investors. Its price/sales ratio 0.20. This is incredible as a company which is much worse off, the ailing company Research In Motion, trades at a price/sales of 0.27. Nokia's price/book is at just 0.66.
Nokia's future potential revenues are very attractive. The Lumia 900 will go on sale to one billion potential customers in China. This is crucial as Nokia's phones hugely outsell the iPhone in China, as its phones are more popular. At a selling price of $645, this is an unbelievable opportunity for Nokia, especially off the already very high reviews in the U.S. Furthermore, Nokia's enter into the tablet market might not be easy at first, but with the Windows operating system, they should grasp some of this lucrative market. Also, Nokia's patent portfolio is perhaps the most valuable patent portfolio of any technology company. Seeing as Google just acquired Motorola Mobility (MMI) for $12.5 billion primarily for its patent portfolio, it stretches the imagination that Nokia could be worth less than that. Lastly, the Nokia-Siemens Network should not be left out. The 4G network deals with T-Mobile and other carriers are worth billions to Nokia.
Why debt is not an issue
Nokia's quick ratio of 1.75 is one of the highest in the industry. It can easily pay off its debt as its cash far exceeds its current short term and long term debt. Investors should not pay attention to the rating agencies who have suggested that Nokia might not be able to pay off its debt. It is important to note that these are the same agencies that downgraded U.S. debt which was also a nonsensical decision.
Nokia has some risks. The obvious competitive pressure in the mobile phone market and tablet market are just a couple. Also, Nokia's mobile phone portfolio is lacking in some areas right now although they have sought to close the gaps. Many analysts have said that Nokia's future is reliant on the success on Windows 8. I would disagree, the metrics speak for themselves, Nokia should be much higher right now without Windows 8. Windows 8 will give an important boost but now determine the success of the company. The last risk to Nokia is a slowdown in the global economy which seems to be happening, however, this will affect every company, not just Nokia. Furthermore, you should buy when blood is in the streets. It is the most effective investment strategy according to Warren Buffet.
You merely have to look at the metrics of Nokia compared to the industry to see how devalued Nokia's stock price currently is. Nokia's price to sales of 0.2 is 6 times less than the industry average of 1.2, also its price/book is less than half that of the industry average. Morningstar's fair value estimate for Nokia is $6, more than 100% upside, and it recommends investors buy anywhere under $3.60. Other key analysts have similar opinions. Therefore, Nokia's is a steal at the current price and has a great future ahead of itself.
All my data is from morningstar.com.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NOK over the next 72 hours.