According to the Oracle of Omaha, when a management team with a reputation for brilliance tackles a business with a bad reputation for bad economics, it is the reputation of the business that remains intact.
This has proven to be true time and again. But sometimes, an exception proves the rule and offers very large investment returns. Think Apple.
We all know Steve Jobs was able to resurrect Apple from history’s dustbin, a remarkable and very unusual feat in the tech world. Now, here is another fading legend trying to emulate this phoenix-like story. Yes, Nokia is the new Apple. Stephen Elop is the new Steve Jobs.
Let me explain. Nokia lost its mojo a decade ago. From being the world’s dominant leader with more than 40% global market share, it gradually became a me-too producer of cheap cell phones.
It is hard to believe, but when I was still young, Nokia phones were the coolest things on the planet. As so often happens, success breeds complacency and before they knew it, the Finnish company’s world market share had dwindled to 23%. If it were not for emerging markets, the brand would be worth very little today. Most damaging of all, Nokia never became a player in the smart phone market. The internally developed software platform, Symbian, proved to be a dud and they always seemed to be two steps behind their competitors. In no time, Apple, Google’s Android and even RIM’s Blackberry had taken the market.
Nokia’s stock dropped from $40 in the summer of 2008 to $5 today.
All the way down, value investors have been trying to catch this falling knife only to get butchered. Nokia seemed to be the typical value trap. Cheap, but getting cheaper. So, what is different now?
First, the market capitalization is down to $19 billion. The enterprise value is at an attractive 0.4 times sales. Nokia has a net $ 7 billion in cash on the balance sheet. It generates a positive cash flow and it has a dividend yield of 4%. The value is undeniable, especially considering their strong business in emerging markets – including India and China. The chart is starting to form a bottom.
The hemorrhage has stopped, but can Nokia create value again?
Enter Mister Elop.
One year ago, he was hired to turn around the company’s fortunes. Part of his appeal undoubtedly came from the executive job he held at Microsoft. His new assignment seems to have been part of a strategic alliance between the two sleepy giants. Microsoft needed Nokia’s manufacturing skills to grow its presence in the smart phone business. Nokia needed a new, more competitive software platform. Stephen Elop’s move from Seattle to Espoo sealed the deal.
The plan was quickly executed. Symbian was replaced with Microsoft’s newly designed and greatly improved platform. Nokia’s new generation of smart phones was going to run on Windows Phone software 7.
As of now, this looks like a good move. Nokia is again an innovator. The new phones have been well received by analysts. Even at the high end, the Lumia 900 got good reviews. Thanks to Windows, Nokia’s smart phones are competitive. And different. Furthermore, Nokia is trying for a comeback in the US market by linking up with AT&T to sell Lumia 900 with 4G service starting in March. The price of $99 will attract consumers’ attention.
Joining forces with Microsoft brings additional benefits. Microsoft is said to have committed one billion dollars in the promotion of their new phone software. Combine that with the fact that information technology managers of most companies are already comfortable with Windows and one can see Nokia making major inroads in the corporate market as well. With RIM in rapid decline today, this segment is up for grabs.
Mr. Elop is doing the obvious too. He is closing down facilities, consolidating Nokia’s zillion research centers all over the world, reducing the workforce and so on. This matters, of course. But the success of the company hinges ultimately on the new smart phone. If it works, the stock will bounce with a vengeance. In hindsight, wouldn’t one wish to have made that same leap of faith at the time Steve Jobs reemerged from Pixel to rebuild Apple?
All right, Stephen Elop is no Steve Jobs.
For one, Mr Elop still wears – gasp – a tie. He also looks a bit too much like a Swedbank branch manager to qualify as the next inspirational Silicon Valley guru.
However, if his deal with Microsoft is half a success, the stock will double or triple. If he then can build on a renewed momentum, Nokia could go up tenfold. Even then, Nokia’s market cap would be less than 50% of Apple’s.
Herve’ van Caloen
Senior Portfolio Manager
Belpointe Asset Management