Nokia (NOK) was once the king of the mobile phone world, but thanks to rapid changes in technology and consumer preferences, it seems that no company stays on top of this industry for too many years. However, if any company has a chance at climbing back into relevancy, it could be Nokia. This seems possible for a number of reasons, which include a strong balance sheet, a valuable patent portfolio, continued innovation, new products, and a focus on emerging market consumers. Let's take a closer look at these factors below:
Nokia has a very strong balance sheet with about $13.5 billion in cash and around $7.28 billion in debt. The current market capitalization is about $14 billion, but the enterprise value is only around $7.62 billion due to the cash position. This valuation appears way too low for a company with roughly $37 billion in annual revenues and also when you consider that this company has many very valuable patents, which are generating significant revenues.
In a recent Seeking Alpha article, Jacob Steinberg makes a solid case for the value that could be applied to Nokia's patent portfolio. Over the years, this company has invested tens of billions into research and development and many companies use the patents and pay licensing fees to Nokia. Mr. Steinberg's article details why the patents could be worth $8 to $15 billion which is significantly more than the enterprise value of $7.62 billion discussed above, the article states:
Nokia is expected generate between $800 million and $1.5 billion in patent license fees and royalty payments annually. Considering how IDC estimates that the smartphone industry is expected to double in size between now and 2017, this number can grow considerably. If we assign a P/E ratio of 10 to Nokia's patent portfolio, the patents under the mobile devices segment alone will be worth between $8 billion and $15 billion.
I really wish I could find the source, but it was reliable. Turns out a while ago, MSFT was interested in Nokia and asked for their books. They turned it down because of their debt. Wish someone could find the source.
In terms of continued innovation and new products, Nokia has both: It recently launched its top-of-the-line Lumia 925 smartphone which is based on Windows 8, and it features a slim design, a number of popular apps like Facebook (FB) and Twitter as well as an 8.7 megapixel camera. It also announced plans to release the "Asha 501" phone into over 90 countries for just $99, (without a contract) starting in June 2013. This phone is likely to do well in emerging market countries due to the affordable price point and the solid reputation that Nokia still has around the world. It makes sense for Nokia to focus on the growth potential that emerging market consumers and countries offer. As an article by "Uncommon Sense" points out, Nokia is planning to "connect the next billion" (smart phone users) and it has one of the most recognized global brands. Most emerging market consumers cannot afford a $500 iPhone, and that leaves a significant market opportunity for Nokia.
In the past, some analysts and investors have suggested that Nokia could be a takeover target due to its low valuation, patents and brand name. Since it has a significant long-time partnership, some believe that Microsoft (MSFT) could be a potential suitor. Microsoft has a massive cash horde of about $74 billion which gives it the ability to buy Nokia a few times over and still have money left over. Microsoft already owns Skype so it is in the communications business and it could expand in that area. In fact, Microsoft might need Nokia more than Nokia needs it. Microsoft might need to make a bold move if it wants to remain relevant in the smartphone space. Without Nokia, who will adopt Windows in the future?
As with any tech stock, there are plenty of downside risks, including obsolescence, which some investors already seem to believe in. While it is easy to point out numerous tech companies that became irrelevant over time, it is also easy to point out others such as Apple (AAPL) that became seemingly irrelevant, and ended up as a single-digit stock just before returning to the top spot. For a time, Apple was the world's most valuable company in terms of market capitalization. Nokia does not need to reclaim the top spot or invent the next iPhone for it to provide investors with major gains and that is why it makes sense to consider the stock while it is still cheap at below $4 per share. Earlier this year, analysts at Argus upgraded Nokia from hold to buy and set a $6 price target. That would give investors gains of over 50% from current levels, but if Nokia does pull off a real turnaround, even $6 might be too conservative