Sean Udall is the author of the TechStrat Report, a tech sector focused newsletter. The following is a free sample. Take a free trial!
It's becoming clear that Nokia's
(NOK) new phones are good, are going to get better, and are seeing initial traction. These are positive signs for the company, which has nearly always been a potent maker of quality consumer handsets that have gained global acceptance. In my view, Nokia appears to be on the comeback trail, and for a number of reasons.
For one thing, the company has massive backing in Microsoft
(MSFT) and its own cash stockpile. So although this is a very competitive space, with Nokia going up against Google
(GOOG) and Apple
(AAPL), there's a strong demand for phones that cost carriers less than $250, and are thus free to the customer. This, combined with marketing muscle, can still sell a lot of product. Especially if that product is pretty darn good. The combination of Microsoft and Nokia equals the necessary marketing muscle, and from what I'm seeing, the new Lumina phones are in fact, pretty darn good.
As alluded to above, Nokia is no slouch itself in the balance sheet department -- with between 34-40% of its total market cap in net cash (roughly $8 billion in net cash/investments).
Does this make Nokia a threat to the twin-headed hydra of Android/iOS? I think not. But the third-place position in global market share, and the tens or even hundreds of millions in global smartphone sales are up for grabs. Where I see Nokia immediately seeing traction is in the overseas, mid-low-end price point market.
Lastly, while the company has struggled to produce profits, the estimate is that it is going to grow EPS by 100%. If it hits that, the stock is trading for 11 times EPS (forward basis) with more than a third of its value in net cash. That's a 6.7 PE net of cash. Sound familiar? It should, as this is the sort of valuation area and net cash that Apple bottomed out at in the late 2008 time frame.
Now I'm not sure Nokia will hit that high growth EPS number. Even so, let's say it just grows half of expectations, at 50% and thus a forward PE of 15. That still gives it a 10 PE net of cash with pretty strong growth.
So how does one trade on this idea? I've added a smallish initial position in Nokia, which I plan on building should weakness allow. However, this could be an improving fundamental situation which would have me adding shares at higher levels. I'd actually prefer this scenario.
Positions in NOK, ADTN, QCOM, CSCO, GOOG, AAPL, MSFT
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