Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) announced on Monday that it was extending its patent licensing deal with Samsung. Of course as with all bits of news, the bulls and bears are each taking the news an entirely different way.
Bulls give Nokia’s deal a thumbs up
Naturally bulls see the extended deal between Nokia and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930) as a big positive. The previous patent licensing deal between the two companies would have expired at the end of this year. Now under the new terms, Samsung will pay more to Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) starting on Jan. 1, 2014.
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Morgan Stanley analysts Francois A Meunier, Andrew Humphrey and Hannah S Harrison note that this extension means that there’s more room for Nokia to increase its patent income. This is important because patent licensing will be one of the company’s newest businesses after the sale of its devices division to Microsoft Corporation (NASDAQ:MSFT).
Valuing Nokia’s patent portfolio
They believe investors are expecting too much in terms of the value of Nokia’s patent portfolio, noting that some value it as high as €20 billion with double digit CAGR for the next two decades. They value it at €4 billion but would raise it after the deal is closed. The analysts kept their Equal-weight rating on Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V).
Credit Suisse analyst Kulbinder Garcha and the rest of the firm’s team is certainly bullish on Nokia, and they estimate the company’s patent portfolio at €8.4 billion, calling that a conservative valuation. Their Samsung analyst Keon Han estimates that Samsung could sell 460 million mobile phones including 314 million smartphones with revenue of €90 billion.
Because of the size of Samsung’s business and how strong Nokia’s patent portfolio is, they believe the expanded deal between the companies will be “meaningfully accretive” to Nokia’s bottom line. They said even if the royalty rate is as low as .5% to 1%, this would drive between €450 million and €900 million in patent revenues for Nokia, which is a significant increase from its current annual royalty run rate of €500 million.
Bears think Nokia’s deal lacks details
The bad news about the deal between Nokia and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), however, is that there is no financial information about it. Nokia said the amount Samsung will pay won’t be settled until a binding arbitration which won’t be concluded for 15 to 24 more months. Bears are sure to point out this lack of detail, although Credit Suisse’s estimates suggest that even with a very low royalty rate, Nokia Corporation (NYSE:NOK) (BIT:NOK1V) (HEL:NOK1V) has plenty to gain from the deal extension.
Credit Suisse continues to rate Nokia as Outperform with a target price of €6.5 per share.