The upcoming week might be the most important of the entire year for the technology sector, or at least the Smartphone Industry. During the next 8 days, four technology giants are expected to launch products, which can change the fortunes of the said companies. On the one hand we have Nokia (NOK); the fallen tech giant is going to launch its WP8 Lumia devices in a bid to revive its falling sales and margins. The announcement will be made tomorrow in a joint press conference with Microsoft (MSFT). Microsoft is the most ideally placed company in this entire patent infringement fiasco. We have already discussed its position in depth, and given it a buy rating. Microsoft is aiming to create a smartphone/tablet ecosystem, similar to its Windows PC ecosystem, where the giant charges a licensing fee to prospective manufacturers.
MSFT's current strategy (i.e. Windows 8, Surface etc) shows that the tech giant sees a future where tablets and smartphones are the desired modes of computing. Therefore, the success of the Windows 8 and WP8 are crucial to the company's future growth prospects. Apple (AAPL), during the last few years, has been on a roll. The stock price has been breaking records despite recession concerns around every corner. It seems that the stock might even break the magical $1,000 hurdle if it keeps its positive outlook. A major risk for investors is the highly undiversified Apple product portfolio. The company generates more than 52% of its total revenues from its iPhone product range, and 21% from the iPad. This goes on to show the importance of an iPhone and iPad release to any movement in AAPL. Apple has still not announced an official release date, but the market expects that the company will announce its iPad mini and the iPhone 5 on September 12.
Major September Launches | ||
Company(s) | Product | Expected Launch Date |
MSFT/NOK | WP8 Lumia | 5th |
Untitled Motorola Phone | 5th | |
AMAZON (AMZN) | Multiple Release, Kindle Fire model | 6th |
APPLE | iPad mini/iPhone 5 | 12th |
These releases make for an interesting situation in the technology sector. We believe there are huge gains to be made through intelligent speculation on the stocks of these companies. We believe investors have an opportunity to make profits using the Nokia call options. Moreover, investors with an AAPL-heavy portfolio can use NOK to hedge themselves against any iPhone 5 launch failure fallout.
In our last update, we discussed the potential benefits of Lumia's Windows Phone 8 launch for Nokia investors. We believe the announcement will have both short term and long term impacts on NOK's price movement. As we have previously discussed, the stock is trading at low multiples, and thus has a limited downside. The upside on the other hand can be huge. The company is still the second largest phone manufacturer in the world, boasting one of the largest patent portfolios in the world. With a current trading price of $2.82, any downside is marginal as compared to the upside in case of a Lumia success.
The price movement will also be highly dependent on the success of an iPhone 5 launch. If Apple succeeds in wooing the market, as is their past record, NOK will face a huge hurdle in executing its turnaround strategy. As we can see in the table below, NOK had an average loss of 10% on the launch of iPhone launches. The low stock price will minimize this loss for investors. In case of a 10% hit, investors will lose a per share amount of only $0.28; a resulting price of $2.58.
iPhone Launch Date | NOK 3 days after Release Date | Nokia Px 15 days before Release | Absolute Loss | % Return/Loss | |
iPhone | Jan 9, 2007 | $19.5 | $22.1 | ($2.6) | -12% |
iPhone 3G | Jun 9, 2008 | $26.8 | $28.5 | ($1.7) | -6% |
iPhone 3GS | Jun 8, 2009 | $15.7 | $14.7 | $1.0 | 7% |
iPhone 4 | Jun 7, 2010 | $9.5 | $15.1 | ($5.5) | -37% |
iPhone 4S | Oct 4, 2011 | $5.8 | $5.9 | ($0.01) | -1% |
Average return | -9.64% |
Nokia Calls Options
We believe a positive launch of the Nokia Lumia and a bad iPhone 5 launch is the best case scenario for the Finnish manufacturer. We believe investors can invest in Nokia call options. If we look at the September call options, we see the highest open interest on a strike price of $3, and second highest on $3.5. This also shows that investors are expecting the September-end price to be around $3-$3.5 for NOK. We believe that in the best case scenario, NOK's price can reach the $4 mark by September-end.
Strike | Ticker | Ask | Bid | Ask | Last | IVM | DM | Volm | OInt |
2.5 | NOK 9/22/12 C2.5 | 0.44 | 0.43 | 0.44 | 0.44 | 104.42 | 0.74 | 658 | 8045 |
3 | NOK 9/22/12 C3 | 0.17 | 0.16 | 0.17 | 0.17 | 96.33 | 0.43 | 2296 | 93561 |
3.5 | NOK 9/22/12 C3.5 | 0.07 | 0.06 | 0.07 | 0.07 | 103.7 | 0.2 | 1428 | 32098 |
4 | NOK 9/22/12 C4 | 0.04 | 0.02 | 0.04 | 0.04 | 113.43 | 0.1 | 505 | 5224 |
Source: Bloomberg
In case of an average scenario where a NOK launch is good and the iPhone launch is also per expectations, we believe the stock might be trading at around $3.25. The table below shows the different returns that investors can earn per option.
Strike | Ticker | Ask | NOK at $2 | NOK $2.5 | NOK $3 | NOK $3.5 | NOK $4 |
$2.5 | NOK 9/22/12 C2.5 | 0.44 | -0.44 | -0.44 | 0.06 | 0.56 | 1.06 |
$3 | NOK 9/22/12 C3 | 0.17 | -0.17 | -0.17 | -0.17 | 0.33 | 0.83 |
$3.5 | NOK 9/22/12 C3.5 | 0.07 | -0.07 | -0.07 | -0.07 | -0.07 | 0.43 |
$4 | NOK 9/22/12 C4 | 0.04 | -0.04 | -0.04 | -0.04 | -0.04 | -0.04 |
The following returns can be earned on these options:
Strike | Ticker | Ask | Nok at $2 | $2.5 | $3 | $3.5 | $4 |
2.5 | NOK 9/22/12 C2.5 | 0.44 | -100% | -100% | 14% | 127% | 241% |
3 | NOK 9/22/12 C3 | 0.17 | -100% | -100% | -100% | 194% | 488% |
3.5 | NOK 9/22/12 C3.5 | 0.07 | -100% | -100% | -100% | -100% | 614% |
4 | NOK 9/22/12 C4 | 0.04 | -100% | -100% | -100% | -100% | -100% |
Source: Qineqt's Calculations
As can be seen in the tables above, investors can use these call options to earn huge returns. We are bullish on Nokia, and are optimistic about a positive Lumia launch. We believe that a successful launch can take the stock to $3.5. Nokia call options can also be used by AAPL-heavy portfolios. A bad iPhone 5 launch will negatively affect AAPL's price, while positively impacting NOK's price. We recommend a NOK 9/22/12 C3 call option for interested investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
