This article will be shorter and sweeter than my previous articles, but with all of the hoopla surrounding the iPhone 5, which it turns out is only a moderate improvement over the prior model, one has to wonder how much competition will catch up with Apple (AAPL). Right now the iPhone is widely owned and is one of the hottest consumer fads. But fads die out and change. It is hard to remember, but not long ago the RAZR from Motorola was all the rage. That is now just a distant memory.
Over the coming few years, I believe Nokia (NOK) will outperform Apple for a variety of reasons. I don't hold the view that their Lumia line of products will put a dent into the iPhone business over the next year or two. Rather, I think it is a focus on its core technology while shedding non-core assets that will ultimately make NOK a better investment over the next few years than AAPL. Additionally, I don't believe investors are properly assessing the long-term value of the iPhone, which will ultimately be commoditized over time. And I don't think they understand how much of a short-term boost the Verizon launch had on their business when it began offering the iPhone a few quarters ago. That catalyst for AAPL is largely behind it.
In looking at the sum of the parts for NOK, you can argue that the company could be valued at over $13 billion using very conservative valuations, which is about $3 billion more than the market is valuing it at right now. This is also assuming the company is only break even in terms of net income.
This article from iStockAnalyst details the sum of the parts of NOK, which I have summarized below.
The company has an expansive patent portfolio, and that there is a steady stream of payments to Nokia for the use of its patents to the tune of 500 million euros per year. Nokia owns over 10,000 patent families after investing more than 45 billion euros.
Nokia has one of the strongest and broadest patent portfolios in the industry, extending across all major cellular and mobile communications standards, software and services, hardware and user interface features and functionalities.
We believe Nokia's patent portfolio could conceivably be worth as much as €6B to an Amazon or a Microsoft.
The patents are normally the hardest to value except NOK already generates $600 million in royalty income annually from its patents from the likes of AAPL and MSFT. A multiple of 12 x annual royalty income isn't that insane of a valuation.
Navteq was purchased by Nokia in 2008 for $8.1 billion. The technology behind Navteq is based on user-observed geographic features as opposed to maps provided by the government. That is, the technology is more open source and provided by users similar to the Google Maps in a way. Navteq digital map data not only enables door-to-door routing throughout Europe and North America, it contains millions of Points of Interest (POIs), making it easy to locate everything from restaurants to hospitals and gas stations. It holds a 90% market share in the car manufacturers industry and it has been selected by Garmin, Magellan, Sony, LG and other important PND vendors to enable their devices.
Navteq is a high margin business and in my opinion it should be valued at around 3 times sales. Navteq's 2010 sales grew 50 percent from a year ago to 1 billion euros, while its operating loss narrowed to 225 million. A valuation of 3 times sales would be around $4 Billion euros.
NET CASH: 4.9 billion Euros.
PATENTS: 6 billion Euros ($7.7 billion)
NAVTEQ: 3.9 billion Euros ($5.0 billion)
NET CASH: 4.9 billion Euros ($6.3 billion)
TOTAL: $19.0 billion
(assumes 1.29 Euros to Dollar conversion rate)
Market Cap: $10.1 billion
Even if you account for losses from a write down of inventory, that's not a cash item, it is a book item. So the cash losses per quarter are more like $200 million. It would take a long time for NOK to wipe out their net cash. Right now the business is worth 90% higher than the current valuation of the company. If you assign a 25% discount to patents/Navteq and assume they lose $2 billion more restructuring the business, you still come to $13.8 billion, which is 35% higher than the current market cap.
With the rise in the Euro recently, those valuations above look better than they did a couple of months ago, which may have fueled part of the recent gains in NOK.
The Nokia Pureview cameras that are coming out are really impressive in terms of camera quality. I believe NOK would be much better off just designing the imaging for cell phones and licensing their technology than going up against the iPhone. However, I do believe that MSFT will invest as much money as possible into the smart phone business which will offer up NOK a chance to make some money in what will ultimately become a commodity business.
But again, NOK has begun focusing more on its patented technologies which will ultimately support a much higher valuation than the market is assigning the stock.