Why You Should Be Bullish About Nokia Stock

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Finnish mobile phone company Nokia (NOK) has been receiving a lot of investor attention lately, due to the huge scale of transition the company is attempting.

nokia-nok-stockAfter Nokia successfully sold its handset division to Microsoft (MSFT) for $7.2 billion, it appeared as if the company had little left that it could sell to unlock substantial shareholder value. But the company has continued to strategically restructure by jettisoning parts of itself and using the proceeds to develop its more promising businesses.

I believe Nokia is making the right moves which could soon become accretive to its earnings and make Nokia stock an attractive haven for long-term investors.

Here’s why investors should be optimistic about the company’s prospects.

Nokia-LG Smartphone Patent Deal

Nokia recently signed a large patent-licensing deal with LG Electronics. Through the deal, LG Electronics will gain access to more than just Nokia’s 60 IP patents. LG has effectively become the first company to sign a patent licensing deal with Nokia since the company sold its handset division to Microsoft.

Part of the Microsoft deal involved 8,500 Android patents that Nokia licensed to Microsoft for 10 years. Nokia owns one of the largest mobile phone patent portfolio in the industry consisting of 10,000 patent families as well as 30,000 patents and patent applications.

Nokia has only licensed a small fraction of its available patents, leaving Nokia stock with plenty of room to run. At the time of Microsoft agreement, analysts valued Nokia’s license portfolio at $11.3 billion. But its value could have risen substantially by now.

The sale of the handset business to Microsoft opened up new licensing opportunities for Nokia since its new licensing deals would now be devoid of any conflicts of interest. As a result, the company gained the freedom to license to more vendors including those in China, Korea and Japan, giving it more bargaining power and the ability to jack up its royalty rates.

So, what is the revenue potential of the LG deal? Nokia said that the exact royalty rates will be determined through arbitration over the next one or two years. But we can hazard some guesses based on Microsoft’s own Android patents.

A Nomura analyst told ZDNet that Microsoft made about $5-$15 per Android device as licensing fee, or a total of about $2 billion on Android phone shipments. The IDC estimates LG commanded a 4.6% global smartphone market share during the first quarter, translating to roughly 61.5 million smartphone units sold by the Korean manufacturer every year.

If we apply the mid-point of Microsoft’s Android royalty rates to LG, then Nokia should realize about $646 million every year from the LG patent deal. I, however, suspect that this could be a pretty conservative estimate since LG sells a lot of premium smartphones, especially the popular LG G3. These should command premium royalties due to their higher ASPs, further boosting Nokia stock.

Nokia finished the first quarter with operating profit of $200 million. The licensing business is very high-margin, with operating margins in the ballpark of 98%. Nokia could easily see its operating profit increase by almost 80% due to the LG deal. The best part is that this will be a nice recurring revenue stream that the company can continue to enjoy for years.

Here Maps Sale Looming

A report by Bloomberg says that a consortium of automakers including Daimler, BMW and Audi are looking to purchase Nokia’s Here Maps business for about $4 billion. Here Maps supplies crucial map data to 80% of North American and European cars with in-dash navigation systems.

Though the figure is well below the $5.6 billion to $7.8 billion that had earlier been floated by Wall Street, it’s nevertheless an improvement over the $3 billion that Uber had previously bid for the business.

I believe a sale is the right thing for Nokia stock right now. Though Here Maps brought in $261 million, or 8% of Nokia’s revenue, during the quarter after growing 25%, future growth potential might be quite limited due to intense pressure from similar offerings by Apple (AAPL), Google (GOOG, GOOGL), Garmin (GRMN) and a host of other tech companies.

Moreover, the consortium of automakers might decide to use its extensive resources to develop its own product. It just makes sense to sell now while interest in the business remains high.

To be clear, the sale might not do much for Nokia stock. Nokia’s balance sheet sports $8.2 billion in current liabilities, or about 30% of Nokia’s market cap. The company might simply decide to use the cash proceeds in debt paydowns to make its balance sheet less leveraged. The real benefits of such moves are sometimes lost on investors.

Still, Nokia is making the right move by selling Here Maps before competitors sink their teeth deeper into the market.

Bottom Line on Nokia Stock

Nokia seems to be on the right track as far as its restructuring efforts go. Its huge treasure trove of mobile patents might prove to be lucrative for Nokia over the long-term. I believe this makes Nokia stock a good holding.

As of this writing, Brian Wu did not own any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/nokia-stock-bullish/.

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