Nokia Corporation (NOK) has some big choices ahead. JPMorgan Cazenove analysts suggest that the path of a focus on IP royalties would be the best choice.
What would it take to transform Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V) back into a growing company? According to analysts at JPMorgan Cazenove, the company's intellectual property will enable it to become itself again.
'Becoming 'Nokia' again'The firm's European Communications Technology team and Communications Equipment and Data Networking team released a report highlighting places where they see Nokia could generate additional value. Their findings suggest that if the company adopted a strategy focused on intellectual property with a royalty of 1 percent per handset, then its stock could be worth between €10 and €15 by 2018. They even see additional potential depending on just how much cash Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V) could generate before then.
The value of an IP-based strategy for Nokia
The analysts say although a network-based strategy focused on Nokia Siemens Networks and an IP-based one are not mutually exclusive. However, their estimates imply that an IP-centric strategy could push the company's earnings before interest and taxes over €2.8 billion by 2018. Of course that depends on Nokia being able to license a bigger part of its patent portfolio and expand the number companies paying royalties.
They said currently Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V) receives about €500 million or $650 million in revenue from its intellectual property. Using the royalty revenue generated by QUALCOMM, Inc. ( NASDAQ:QCOM) in 2012 as a benchmark, this would be less than 10 percent of Qualcomm's IP revenue or a .33 percent royalty rate. The analysts said the low rate they're estimating for Nokia is because of a 'defensive IP stance, cross licensing and not pursing non licensees significantly.'
What a network-based strategy would look like
They said a strategy that's focused on building out Nokia Siemens Networks can also lead to growth, but they see substantial disruption in the near term if the company takes the path of an acquisition for growth. They note that the biggest problem in wireless infrastructure is that the market's overall size isn't growing. As a result, NSN can only grow if it takes share from others or acquires other companies.
This is not only capital consuming, but also could create major disruption as the company consolidates and lays off workers. Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V) could end up losing some share because of market reasons. Using the example of an Alcatel Wireless acquisition, they said Nokia's 2018 earnings, assuming no IP expansion, would be €2.3 billion.
NSN versus Nokia's patent portfolio
They also said the earnings multiple will be higher for an IP-centric earnings stream when compared to an NSN-centric stream. They suggest that if Nokia grows its IP revenue, its multiple could go as high as Qualcomm was in the early 2000s.
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