The last and the only reasonable option is to acquire the highly undervalued Nokia Corporation (ADR) (NYSE:NOK) which has over 10,000 patents and a history of making top class devices. The two companies have already worked together on the Lumia WP8 rollout, and more importantly Lumia is already a flagship device for Windows 8. Therefore, it is evident that if Microsoft Corporation (NASDAQ:MSFT) ever plans to enter the smartphone hardware arena, it has already shown a flair for hardware with Surface tablets and Xbox, its only logical choice is to acquire Nokia.
Valuations
Nokia Corporation (ADR) (NYSE:NOK) traded below $2 last year, but after its resurgence the shares have been oscillating around the $4 mark. The company generates sales of around 5.9 billion euros ($7.8 billion) with Nokia Siemens Networking (NSN), the network equipment unit, generating 2.8 billion euros ($3.7 billion). The progress made by smartphone segment was outdone by the decline in feature phone segment, so its sales continue their downward trend. We can calculate a ‘safe’ value for Nokia Corporation (ADR) (NYSE:NOK) by totally ignoring the phone segment.
NSN generates annualized revenues of around $15 billion, a per share value of $4.7. The company also has approximately $6 billion in net cash i.e. $1.6 per share. Ericsson is currently trading at a P/S of 1.12x which gives us an approximate value of $5.2 for NSN. This gives a $6.8 target price even without the entire phone segment.
Bottom line
Nokia is an attractive acquisition target due to its cheap valuations, rich patent portfolio and NSN division. Microsoft Corporation (NASDAQ:MSFT) has already shown a flair for hardware manufacturing with the highly acclaimed Xbox and Surface. However, if the company plans to enter the smartphone manufacturing business it will need to acquire or develop/buy the necessary patents and manufacturing capability. This makes Nokia the best fit for a cash rich Microsoft Corporation (NASDAQ:MSFT) which is already a partner in Lumia.
Feature phone revenues are declining, but the Lumia series is gaining traction in both high and low-end markets. If we ignore the troubled phone segment entirely, Nokia Corporation (ADR) (NYSE:NOK) is still worth $6.80 per share. This is why the troubled Finnish smartphone giant is an excellent investment.
The article You Can’t Lose on This Bet originally appeared on Fool.com and is written by Mohsin Saeed.
Mohsin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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