The Hint That Drove Nokia to New Highs

When Nokia (NYSE: NOK  ) CEO Stephen Elop said in an interview with CNET that the company "is planning a lot of exciting things with Verizon" (NYSE: VZ  ) , the stock climbed to an eight-month high during Tuesday's trading session. Shares closed up 6.3% to $4.20.

While no more specifics were given, the hint was sufficient to drive the shares higher, presumably under the assumption that the nation's biggest 4G LTE carrier will get some version of the company's flagship Lumia 920 that runs on the Microsoft (NASDAQ: MSFT  ) Windows platform. Given the exclusive relationship that Nokia established with AT&T (NYSE: T  ) , the details of the Verizon launch are critical. While I am hesitant to buy stocks on the heels of big pops, Nokia has plenty of room to the upside.

AT&T exclusivity
The decision by Nokia to opt for an exclusive sales arrangement is not the first time that such a decision has been made in the hopes of great success. Apple (NASDAQ: AAPL  ) , as we all recall, originally launched the iPhone with AT&T to the exclusion of all other carriers. When Elop was asked about the decision to limit the availability of the flagship Lumia 920, he gave the company's perspective:

One of the things we had learned with the first launch was being very narrow would yield better results for us. We take a product and go exclusive with a particular carrier. In a market where subsidy and marketing dollars are heavy, we encourage them to promote it as a hero product, and use the subsidy to drive down the pricing to a competitive point. It also gives you access to in-store resources.

Obviously, the idea of a "hero product" can be a critical selling point for a particular device. Just as the iPhone has been that hero product for Apple (which is a foregone conclusion given Apple's limited product range), on the Google Android side of the world, the dominant hero product role has shifted between multiple cast members -- the Motorola Droid line and certain models from HTC have held top spots, though Samsung now holds the honor. According to a recent Gartner release, "The Galaxy S3 was the best-selling Android product in the quarter."

Both AT&T and Verizon have long-established their respective skill at retaining customers. AT&T's experience at hyping an exclusive flagship product may have influenced the decision, but it is likely that the terms reached between Nokia and AT&T played a role as well. Despite the popularity of AT&T's 4G LTE coverage, it cannot match Big Red in breadth -- Verizon covers roughly four times as many markets than AT&T. Given this disparity, AT&T may have been more anxious to reach favorable terms.

A new hero
While Elop praised the virtues of his company's relationship with AT&T, he made clear that Nokia is not sitting still to watch as things develop:

There might be another similar hero exercise with a different operator. In this particular moment, the opportunity with the Lumia 920 presented well with AT&T. And we're pleased to have just restarted our relationship with Verizon.

The recent victory scored by Nokia to bring the Lumia 920T to China Mobile and its 700 million total users led to both a Nokia pop and a painful drop in Apple shares. The introduction of an increasing broad U.S. base would be significant victories for both Nokia and Microsoft. Each of these companies once held the dominant positions in their respective fields and is looking to return to important roles. As Microsoft looks to expand its Windows phone reach with HTC, solid distribution for Nokia, coupled with the first-mover advantage, may prove critical.

Can Nokia keep running?
The question that investors must ask is whether Nokia's stock can continue its impressive run higher. The Verizon news, while certainly a catalyst for a pop, is hard to quantify before you know what offering from Nokia will be available on the Big Red network. In any event, the important holiday retail season will not be a part of the company's sales numbers on Verizon. Arguably one of the best pieces of news for Nokia has been the perception of continuing struggles for Apple. While Nokia shares have enjoyed an impressive run, they look to have additional upside and I consider them a buy at current levels.

Nokia's been struggling in a world of Apple and Android smartphone dominance. However, the company has banked its future on its next generation of Windows smartphones. Motley Fool analyst Charly Travers has created a new premium report that digs into both the opportunities and risks facing Nokia to help investors decide if the company is a buy or sell. To get started, simply click here now.


Read/Post Comments (7) | Recommend This Article (4)

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  • Report this Comment On December 19, 2012, at 6:58 PM, cpemail wrote:

    Both Apple and Nokia will become 100 billion dollars companies by June 2013, because Nokia's technology core has more value then Apple's all package and no content marketing strategy, that has to be sustained by a 10:1 marketing to engineering.

    Apple can't lie to all the people all the time, and when it will fail down it won't have the required core to come back.

  • Report this Comment On December 19, 2012, at 9:22 PM, robmxa wrote:

    The incredible news for Nokia today was the decision by China Mobile to sell it's Nokia flagship phone, the Lumia 920, for ONE YUAN or $.16 (cents) with a two year commitment.

    So Apple is in a box it appears to me. To make a deal with China Mobile they will have to trim their margins IMO, something Apple can't do, won't do IMO until forced to later in this cycle.

    In the meantime Nokia has the 700 million China Mobile cell customers to sell to at ONE YUAN.

    And Nokia has a lineup of less expensive phones to sell all possibly with subsidies with China Mobile.

    Then there is Europe where Nokia is already more popular and the Lumia 920 works with the 4G LTE systems there unlike the iPhone.

    Nokia has a lot going for it the most explosive of which is the deal with China Mobile and their full subsidy. When the market absorbs this we will see another leg up to the $6 + level and the closing of the 4/12 gap not to mention the golden cross it has made just now.

  • Report this Comment On December 19, 2012, at 10:43 PM, AdaJohansson wrote:

    Thanks, Doug Ehrman, for this article.

    Because I also think Nokia is a stock to own with great upside opportunity right now, I have to say there are many more factors that have driven Nokia lately and into the future. Beside Verizon news, which is of course very important for North America markets and Wall Street, for example in China regarding Gartner´s report, WP phone sell is going to pass 10 million units worldwide this quarter alone. In Finland, with national TV interview, even though CEO Stephen Elop did not say how many units of Lumia 920 have been sold, but he thanked shareholders and people who have supported Nokia through difficult times. He also said all the hard work has been worth it and the company is starting to see ray of light and the effort has been now fruitful.

    According to China site, the Nokia factory in Beijing alone is producing about 600 000 units of Lumia 920 a month (Nokia has several factories, so we don´t know if Nokia is producing Lumia 920 in other factories or not, but this Beijing factory also produces other Lumia phones, and the production in this factory alone is about 2 million Lumia phones a month.)

    Then there is also a piece of news that Nokia will launch a tablet next year at MWC. In addition to positive Lumia 920 news, Nokia´s Asha phones are said to be ones of the hottest Christmas presents this year for kids in many countries.

    Lately, many investment banks have raised

    Nokia´s price target, so the average target price of Nokia at NYSE and Helsinki will also rise soon.

  • Report this Comment On December 19, 2012, at 11:16 PM, auggie123 wrote:

    everybody I know that has a android hates it and a friend that has a S3 said it's like talking on a hoagie roll - so with that being said this isn't about samsung and google/anfroid it is apple vs. ms and the operating sysrwm is gonna be what makes it or breaks it

  • Report this Comment On December 20, 2012, at 1:02 AM, AdaJohansson wrote:

    Yes, I totally agree. One should keep in mind some important points.

  • Report this Comment On December 20, 2012, at 1:04 AM, AdaJohansson wrote:

    At this price, NOK is undervalued.

    Morningstar´s analysis about Nokia:

    Estimated price: intellectual properties over 1 euro per share (Motorola´s patent portfolio was worth about $5.5 billion); other business parts (smartphones, featurephones, NSN) at least over 1.50 euro per share.

    And NAVTEQ´s price not included (Nokia bought NAVTEQ with 5.7 billion euro). All in all, even in this case, Nokia share price would be at least over 2.50 euro, excluded NAVTEQ! And Nokia´s net cash is now 3.6 billion euros.

    In other words, the sum of parts of Nokia and net cash are worth much more than its market cap now, which means NOK share is right now heavily undervalued.

    Nokia Is Still Extremely Cheap

    The company has since partially offset these fears with excellent cash management, restructuring aimed at reducing costs, and more recently, its better than expected 3rd quarter results. The company achieved operational profitability (1.1% non-IFRS) with better than expected revenues, triggering a 20% increase in stock price. As the table below shows, these factors have enabled Nokia to maintain a healthy interest coverage ratio and quick ratio (nearly equal to the industry average), dispensing any immediate liquidity concerns.

    Company

    Industry

    Sector

    Quick Ratio (MRQ)

    1.16

    1.62

    1.64

    Current Ratio (MRQ)

    1.28

    1.96

    3.01

    LT Debt to Equity (MRQ)

    48.76

    22.29

    10.61

    Total Debt to Equity (MRQ)

    66.45

    39.67

    19.69

    Interest Coverage (TTM)

    4.9

    4.91

    164.78

    Figure 1: Financial Strength/ Reuters

    Valuation

    Nokia is currently operating at a loss and the sell side expects the company to become profitable, somewhere in 2014. The stock is very volatile, as can be assessed from the 100% run in the last 6 months. I believe Nokia’s share price will continue to fluctuate with short term catalysts and it’s still pointless to value the stock on 2014 earnings given the uncertainty. Instead, investors should value the company on a worst case scenario. I believe at this point, Nokia’s biggest assets are its impressive patent portfolio, Cash, NSN and Navtaq.

    I have used three recent patent sales to get an approximate value per share for Nokia’s current patent portfolio.

    $ millions

    AOL (AOL) Patent Sale

    Vringo (VRNG) Purchase

    Nortel Networks

    No. of Patents Sold

    800

    500

    6000

    Sales Value

    1100

    22

    4500

    Price Paid Per Patent

    1.4

    0.0

    0.8

    No Nokia Patents

    9500

    9500

    9500

    Patent Portfolio Value

    13063

    418

    7125

    Shares Outstanding

    3830

    3830

    3830

    Per Share ($)

    3.4

    0.1

    1.9

    Average Price Per Patent

    0.79

    Average Patent Portfolio Value

    7316

    Average Per Share Value ($)

    1.91

    Figure 2: NOK Source: Google Finance

    As the calculations show, the patent value per share of Nokia’s patents comes down to $1.91 per share. According to Nokia’s disclosures, the company ended Q3 with gross cash of $11.5 billion (EUR 8.8 billion). The Q3 results also indicated that Nokia had EUR 288 in currently maturing debt and EUR 1.1 billion in short term borrowing. Deducting other liabilities, we arrive at a net cash position of $4.7 billion (EUR 3.6 billion). This comes down to a per share amount of $1.22, and adding the per share patent value of $1.91, the value of cash and patents together is $3.13.

    Bottom Line

    Nokia still trades way below its salvage value. The company’s patents and net cash, alone are worth $3.13 per share. This of course does not include Nokia’s Navtaq business and NSN (Nokia Siemens Network). These divisions continue to be profitable, despite problems of Nokia’s smartphone division. In Q3 NSN sales were EUR 3.5 billion and operating profit was EUR 323 million; the operating profit of location and commerce segment was EUR 37 million. The combined value of Navtaq (3x sales for $3 billion) and NSN (0.5x sales for $7 billion) is around $10 billion ($2.6 per share). This gives us an approximate per share value of $5 for NOK. Therefore, Nokia is still trading at a discount to its salvage value and is an excellent value opportunity.

    M.S./SmartEquity

    And why is NOK still so cheap?

    Because the stock has been over sold.

    Nokia is the most short sold stock in both Helsinki and New York!

    NOK short interest:

    NYSE November 30

    295,118,232 shares

    Helsinki December 6

    10.7% (with investors over 0.5%, below 0.5% not listed)

    Nokia´s total share number (approximately 3.75 billion shares) covers both New York and Helsinki.

    That makes the sort interest in NOK around 20%!

    Nokia is a good candidate for a big short squeeze!

  • Report this Comment On December 20, 2012, at 4:11 PM, AdaJohansson wrote:

    Right now, the stock is at this price (no tech stocks usually this cheap with valuations), just because the stock has been beaten down and short sold extremely heavily around 20% of the company´s total share number (New York + Helsinki).

    When and if Nokia reports profit, will one have a chance to buy the stock at this price anymore, the answer might be NEVER!

    Now, many authors start to write how much the stock has jumped, but they might have forgotten the realizing of the whole picture scale. Only one and a half year ago, Nokia was still around $10.

    And keep in mind, the stock went down like this, just because of the bearish idea that the company would have gone bankrupt. Without that NOK would have never been this cheap.

    Also remember that Nokia has beaten estimations and expectations in the last two quarters (in 3Q the EPS was -0.07 euro per share any more, while the consensus was -0.11 euro per share), that is why the stock is now over $4, it is not just due to the recent positive news alone.

    It is worth to keep in mind that the stock is undervalued right now.

    Nokia has "low end competitive Asha phones and high end competitive Lumia phones", that is why I trust in Nokia´s phone business into the future. Apart from that, one of the reasons why I chose NOK, is because Nokia has other business units like Navteq, NSN and intellectual property rights.

    Business men and women like the Lumia 920T in China, because of Office, good maps and location data City Lens and GPS, and good virus protection firmware built in the phone.

    Clove UK has completely sold out Lumia 920. EE still has supply. EE-exclusivity ends January, so also other carriers in UK will sell the phone.

    Lumia 920 AT&T back at Amazon US, supply just arrived.

    Lumia 920 and Lumia 820 are arriving India in January.

    Lumia 620 (the most affordable WP8 phone up to date) is available in many markets starting the end of January, including China and India.

    Lumia 800 at number 1 in Amazon UK.

    Lumia 800 and Lumia 610 in UK top ten chart.

    Nokia has brought a new app called “Nearby” into Asha phone line. “Nearby” is almost the same as Lumia´s City Lens, which is one of the most advanced, useful and unique features in Nokia Lumia phones. It has location data, such as restaurants, hotels, hospitals, shops, sight-seeing places etc, and also voice guided navigation how to go there by walking, by car or by public transport.

    Lumia 505 is being launched in Mexico.

    Lumia 510, 610, 710, 800 and 900 are getting firmware update from WP 7.5 to WP 7.8

    The new lots of these phones are going into the markets with WP 7.8 factory installed.

    Lumia 920T is selling well at China Mobile.

    The first lot of the phones arriving around Christmas, second lot in January.

    China Mobile sells Lumia 920T for 4599 yuan, but with wireless charging pad or other gifts. So the phone costs only about 4000 yuan.

    It is much cheaper than Galaxy Note II or iPhone 5.

    Bloomberg reported, in Sweden consumers returned iPhone 5 and changed it into a Lumia 920, because iPhone 5 does not work in 4G there and the Lumia 920 works.

    Actually, iPhone 5 works only on two 4G networks in Europe, while Lumia 920 works on two dozen 4G networks there.

    T-Mobile Germany Forced to Offer the Nokia Lumia 920 Due to High Demand.

    PhoneArena just chose Nokia´s PureView camera technology in phones as the best innovation of the year. Also Lumia 920 belongs to the best product designs of the year.

    Lumia 920 wins Gizmodo Australia’s Mobile Phone of the Year 2012 People’s Choice Award.

    The Independent UK calls the Nokia Lumia 920 “the most advanced smartphone on the market”.

    Beside Verizon news, which is of course very important for North America markets and Wall Street, for example in China regarding Gartner´s report, WP phone sell is going to pass 10 million units worldwide this quarter alone. In Finland, with national TV interview, even though CEO Stephen Elop did not say how many units of Lumia 920 have been sold, but he thanked shareholders and people who have supported Nokia through difficult times. He also said all the hard work has been worth it and the company is starting to see ray of light and the effort has been now fruitful.

    According to China site, the Nokia factory in Beijing alone is producing about 600 000 units of Lumia 920 a month (Nokia has several factories, so we don´t know if Nokia is producing Lumia 920 in other factories or not, but this Beijing factory also produces other Lumia phones, and the production in this factory alone is about 2 million Lumia phones a month.)

    Then there is also a piece of news that Nokia will launch a tablet next year at MWC. In addition to positive Lumia 920 news, Nokia´s Asha phones are said to be ones of the hottest Christmas presents this year for kids in many countries.

    At this price, NOK is undervalued.

    Morningstar´s analysis about Nokia:

    Estimated price: intellectual properties over 1 euro per share (Motorola´s patent portfolio was worth about $5.5 billion); other business parts (smartphones, featurephones, NSN) at least over 1.50 euro per share.

    And NAVTEQ´s price not included (Nokia bought NAVTEQ with 5.7 billion euro). All in all, even in this case, Nokia share price would be at least over 2.50 euro, excluded NAVTEQ! And Nokia´s net cash is now 3.6 billion euros.

    In other words, the sum of parts of Nokia and net cash are worth much more than its market cap now, which means NOK share is right now heavily undervalued.

    Nokia Is Still Extremely Cheap

    The company has since partially offset these fears with excellent cash management, restructuring aimed at reducing costs, and more recently, its better than expected 3rd quarter results. The company achieved operational profitability (1.1% non-IFRS) with better than expected revenues, triggering a 20% increase in stock price. As the table below shows, these factors have enabled Nokia to maintain a healthy interest coverage ratio and quick ratio (nearly equal to the industry average), dispensing any immediate liquidity concerns.

    Company

    Industry

    Sector

    Quick Ratio (MRQ)

    1.16

    1.62

    1.64

    Current Ratio (MRQ)

    1.28

    1.96

    3.01

    LT Debt to Equity (MRQ)

    48.76

    22.29

    10.61

    Total Debt to Equity (MRQ)

    66.45

    39.67

    19.69

    Interest Coverage (TTM)

    4.9

    4.91

    164.78

    Figure 1: Financial Strength/ Reuters

    Valuation

    Nokia is currently operating at a loss and the sell side expects the company to become profitable, somewhere in 2014. The stock is very volatile, as can be assessed from the 100% run in the last 6 months. I believe Nokia’s share price will continue to fluctuate with short term catalysts and it’s still pointless to value the stock on 2014 earnings given the uncertainty. Instead, investors should value the company on a worst case scenario. I believe at this point, Nokia’s biggest assets are its impressive patent portfolio, Cash, NSN and Navtaq.

    I have used three recent patent sales to get an approximate value per share for Nokia’s current patent portfolio.

    $ millions

    AOL (AOL) Patent Sale

    Vringo (VRNG) Purchase

    Nortel Networks

    No. of Patents Sold

    800

    500

    6000

    Sales Value

    1100

    22

    4500

    Price Paid Per Patent

    1.4

    0.0

    0.8

    No Nokia Patents

    9500

    9500

    9500

    Patent Portfolio Value

    13063

    418

    7125

    Shares Outstanding

    3830

    3830

    3830

    Per Share ($)

    3.4

    0.1

    1.9

    Average Price Per Patent

    0.79

    Average Patent Portfolio Value

    7316

    Average Per Share Value ($)

    1.91

    Figure 2: NOK Source: Google Finance

    As the calculations show, the patent value per share of Nokia’s patents comes down to $1.91 per share. According to Nokia’s disclosures, the company ended Q3 with gross cash of $11.5 billion (EUR 8.8 billion). The Q3 results also indicated that Nokia had EUR 288 in currently maturing debt and EUR 1.1 billion in short term borrowing. Deducting other liabilities, we arrive at a net cash position of $4.7 billion (EUR 3.6 billion). This comes down to a per share amount of $1.22, and adding the per share patent value of $1.91, the value of cash and patents together is $3.13.

    Bottom Line

    Nokia still trades way below its salvage value. The company’s patents and net cash, alone are worth $3.13 per share. This of course does not include Nokia’s Navtaq business and NSN (Nokia Siemens Network). These divisions continue to be profitable, despite problems of Nokia’s smartphone division. In Q3 NSN sales were EUR 3.5 billion and operating profit was EUR 323 million; the operating profit of location and commerce segment was EUR 37 million. The combined value of Navtaq (3x sales for $3 billion) and NSN (0.5x sales for $7 billion) is around $10 billion ($2.6 per share). This gives us an approximate per share value of $5 for NOK. Therefore, Nokia is still trading at a discount to its salvage value and is an excellent value opportunity.

    M.S./SmartEquity

    And why is NOK still so cheap?

    Because the stock has been over sold.

    Nokia is the most short sold stock in both Helsinki and New York!

    NOK short interest:

    NYSE November 30

    295,118,232 shares

    Helsinki December 6

    10.7% (with investors over 0.5%, below 0.5% not listed)

    Nokia´s total share number (approximately 3.75 billion shares) covers both New York and Helsinki.

    That makes the sort interest in NOK around 20%!

    Nokia is a good candidate for a big short squeeze!

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