Once in a great while, a stock benefits more from the folly of others than from its own efforts. Such is the case with Nokia (NOK). Just days ago, Nokia share prices were falling quickly. All that changed with the favorable patent infringement verdict Apple (AAPL) won against Samsung. After the verdict, Nokia shares moved up almost 9%. As recently as July 18, Nokia had hit its 52-week low of $1.63. Given this positive catalyst for Nokia, I decided that it deserves a second look. Maybe this trend is sustainable.
To determine the sustainability of Nokia's surge, we will begin with the fundamentals. Nokia currently trades at around $3 per share and has a market cap of around $10 billion. The trailing 12 months price-to-earnings ratio is not available because it lost money in the most recent quarter. The P/E growth ratio is at the "nosebleed" level of 5.42. Price to book is super at 0.90. Return on equity is abysmal, reported at -35.63%. Quarterly year-over-year revenue growth stands at -18.7%%. Quarterly year-over-year earnings growth is not available. Nokia's debt to equity is surprisingly good at 50.59, and the current ratio is superb as well. The stock pays a dividend yielding 9.6%, but the payout ratio is not available because a payout ratio is a percentage of earnings. No earnings, no payout ratio.
Before looking into Nokia's future, I'd like to highlight the ripple effect Apple's successful patent litigation with Samsung had on stock other than Nokia's. As a master of the obvious, I can tell you that Samsung received a serious blow and this fact was not lost on its shareholders, who fled in droves. The stock fell 7.5% in trading in Seoul. Now the only question is: "How low will it go?" Predictably, Apple also got a bounce of 2.8%. While it is by no means certain that Apple will see any of the $1 billion awarded by the court, the victory is very likely to boost Apple's revenue through iPad/iPhone sales and patent licensing fees. Google (GOOG) was also a victim because the Samsung smartphones utilize Google's Android technology. Conversely, Microsoft (MSFT) benefited from the news. Its Windows 8 operating system is used for the new Nokia Lumia smartphones. The list is actually more extensive than this, including companies in Samsung's supply chain and other companies with devices using Android technology.
Nokia is in a good position to sustain its comeback. The U.S. market, already actively courted by Nokia, may soon be virtually closed to Samsung. No other manufacturer is in a better position to fill the vacuum. Even Motorola Mobility's Android-based smartphones are now in question. You could make the argument that Sprint, Verizon, and others will take the safer route as it negotiates with manufacturers.
With Nokia expected to launch its first smartphones using a new version of Windows Phone software in early September, the timing of this could not be better. In my view, Nokia will benefit from the ongoing battle Apple is waging against Samsung. Apple's most recent thrust is aimed at banning sales of eight different Samsung smartphones, including the Galaxy S2, Galaxy S 4G, and Galaxy Prevail. Hearings are scheduled to begin Dec. 6. Other pending litigation is likely to keep Samsung in court through most of 2013. In my opinion, many consumers will look beyond Samsung. When you consider the sizable investment a smartphone purchase represents, many may hesitate to buy the Samsung brand due to concerns that it may not be fully supported in the future.
Nokia's strength lies in its ability to focus on the Windows 8 platform, unfettered by lawsuits, its alliance with industry giant Microsoft, and its hunger to regain a sizable share of the smartphone market. Nokia's weakness is that its eggs are all in the Windows 8 basket. Nokia is at a crossroads. If consumer response to its newest Lumia launch is not huge, Nokia is in serious trouble.
Apple's iPhones are widely resented by U.S. major mobile service providers because of the hefty price premium. Providers would benefit from robust consumer demand for Nokia Windows 8 phones. For this reason, Nokia is likely to receive a great deal of support from the major providers.
Apple, with a market cap around $664 billion, trading at about $665 per share, and sporting a trailing 12 months P/E ratio of 15.64 is a formidable competitor for the investor's buck. Its attractive P/E growth ratio of 0.68 makes its hefty price to book of 5.57 almost palatable. Its return on equity of 24.57 and quarterly year-over-year revenue and earnings growth of 22.6% and 20.7%, respectively, are truly enviable. It sits at the zenith of tech stocks, and at the apex of a mountain of cash ($27.65 billion). Of course, it has no debt. It pays a dividend that yields 0.4%. That said, it is only as valuable as its latest innovation.
For now, Nokia seems to have peaked. In my view, the sidelines are the best place to be until the new phone is launched and an assessment of consumer sentiment can be made. Apple remains the safest play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.