Quick Nokia Thesis: Nokia trading below liquidation value; Transition to Windows Phone OS promising
Nokia is going to declare a dividend on May 4 of EUR 0.2. That works out to 7% yield on current market price.
In theory, the market price of the company falls by the dividend amount as soon as it goes ex-dividend, but Nokia shares are already so depressed, I'm not sure if it will decline by the full extent of the dividend.
I'm long Nokia for the following reasons:
1) Nokia still has a strong brand - especially in emerging markets. IMO Nokia has the best non-Apple industrial design and build quality.
2) Windows Phone OS has gotten rave reviews; count Apple co-founder Steve Wozniak a fan. Microsoft will pump as much as it takes to ensure the platform is a success. The carriers want more OS competition to break the iPhone, Android duopoly. Windows OS will have exclusivity on Microsoft Office for phone and tablet, which is pretty significant for enterprise and some home users.
3) Nokia Siemens Networks accounts for around 40% of revenues. It's barely making a profit right now, but there's a whole bunch of investment in new telecom network infrastructure and network improvements across the world, so to me it seems to be a great business. The company doesn't invest in the infrastructure, but instead provides tech consultation or "end-to-end solutions", and supply equipment to those carriers.
5) Smart phone wars in emerging markets still nascent. Because EM don't have carrier subsidy model, smartphone penetration is still fairly low. Windows OS could compete in emerging markets even if they don't do well in the U.S. They're still selling 20mn Symbian crap phones every quarter mainly in EM.
6) I've heard concerns expressed about top talent fleeing sinking ship. But I'd argue the opposite… If you are a brilliant developer, quit Apple and go work at Nokia, get a great salary and stock options at $3 per share instead of Apple's $600! Microsoft is so committed to Windows phone, that if talent leaving was an issue, they might just announce a "strategic investment" causing the price to take off.
7) Nokia sold 40mn smartphones Q4 2010, and 20mn Q4 2011 (thanks to Symbian decline). Hypothetically, the market will easily lap up 150mn Nokia branded phones every year. If Nokia were to completely exit the phone business and just licence their brand to some Chinese manufacturer like ZTE, Hyawei or similar for $5 a phone, that would be straight $750mn-$1bn a year. It's not going to happen, but that's just a quick and dirty way of attaching a value to the brand. Price that at a conservative 5x earnings, and the brand alone is conservatively worth $5bn.
I guess similar statements could have been made about Kodak which went bankrupt, so it's still a risky buy. But if things work out this will be a multibagger (think Ford in 2009/Tata Motors post JLR acquisition)… but the funny thing is, those companies were saddled with debt, so their situation and staying power was even more precarious. Nokia has more cash on its Balance sheet than debt!
Nokia is far from doomed. Barnes & Noble seemed doomed, until its share price doubled when Microsoft inked a deal with them. There are plenty of cash rich tech companies throwing money around; Nokia seems to be a STEAL at $6.4bn enterprise value (Market cap of $13bn + $6.4bn debt -Cash $13bn cash). It burned through $600mm in cash in Q1 2012, and is likely to do so in the near future, but it's got plenty of staying power with the amount of cash it has. Could Microsoft announce a 'strategic investment' in Nokia? Nokia does appear Nokia to have an impressive patent portfolio, with revenues close to hitting EUR 500 million annually. Mkt seems to have forgotten this event not too long ago.
I'd buy, strip the 7% dividend, and keep a stop-loss of $3, and hope for a multi-bagger.
Disclosure: I am long NOK.
Additional disclosure: Initiated position in past 24 hours. Plan to do more detailed analysis on liquidation value.