Nokia Corporation (ADR) (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) is getting out of the mobile manufacturing business, and analysts couldn’t be happier. The bull case compares Nokia to QUALCOMM, Inc. (NASDAQ:QCOM), a company that has been hugely successful monetizing its patent portfolio, but according to Morgan Stanley analyst Francois Meunier, the comparison doesn’t hold.
“While bulls on the stock point to QUALCOMM, Inc. (NASDAQ:QCOM),” he writes, “we think this may be premature. Nokia already receives license income from the two largest smartphone players – Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) – as well as Microsoft Corporation (NASDAQ:MSFT). The lack of other business with these players (cf. Qualcomm) could also affect Nokia’s ability to monetize / develop its IP.”
Nokia’s patent expansion, IP portfolio key issues
Meunier has increased his price target for Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) from €5.00 to €5.50, but he’s still fairly neutral on the stock. He forecasts €800 million in patent income next year, including €125 million for the Microsoft deal and an additional €150 million from Samsung, but he doesn’t see the opportunity for further expansion. Meunier also points out that Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) will need to beef up its IP portfolio, which will require a heavy OPEX investment. Also, bulls who use Qualcomm as an example of how much money can be made out of IT royalties should bear in mind that Qualcomm’s rates have been falling.
Nokia Siemens to benefit from cash on hand
Microsoft Corporation (NASDAQ:MSFT) offered $7.3 billion to buy Nokia’s devices division and license the company’s IT patents for ten years back in September, and while the deal hasn’t been finalized it doesn’t look like it will have any problems getting regulatory approval. The main question now is what Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) will do with all the cash that it has on hand. Obviously the bulls who are comparing Nokia to QUALCOMM, Inc. (NASDAQ:QCOM) are most excited about what it can do with its IP holdings, but its main business will likely be Nokia Siemens Networks, a formerly loss-making division that has been turned around under the leadership of CEO Rajeev Suri and earned nearly $13 billion in the first three quarters of this year.
But Suri has said that he wants to “trade some of that profit for top line,” implying that he will be less picky with his bids in the future, even if that means letting margins fall a bit.