Nokia: from buying at €2 to selling at €5.70 with a leveraged CFD

Nokia: from buying at €2 to selling at €5.70 with a leveraged CFD

In August 2012, Nokia shares were worth €2 and much of the market had written them off. The analysis that peine this matter argued the opposite: that the company was “totally undervalued from an accounting standpoint” and could double or triple its value in a short time. The thesis was not the phone; it was the assets. A little over a year later, the stock was nearing €6 and the trade, according to its author, was closed with leveraged CFDs at 10 to 1 on a €5,000 position, exiting at €5.70 per share. The hook was textbook: the new Apple.

Lumia 920 vs. iPhone 5: the hardware thesis

The starting argument was technical. The Lumia 920 arrived with a Carl Zeiss PureView camera, wireless charging and a screen that could be used with gloves or any object. Against it, the iPhone 5 came across as a spent product: “more than an evolution, an update,” with specs almost identical to the 4S and a thinner casing. Proof of wear was iOS 6, whose Apple Maps placed cities in the middle of the ocean and cut points of interest versus Google Maps.

The conclusion was that Apple had lost the attention to detail that made it great under Steve Jobs, while Nokia, without that leadership, was innovating. Against it weighed another reading: that the Finnish company had no room between the iPhone and high-end Android, with Huawei pressing from below. And an anecdote the analysis itself overlooked: Lumia carried unfortunate connotations in Spanish, as peine to the Mitsubishi Ensimismado in its day.

Navteq: the asset nobody was watching

Beneath the phone was a maps company. Nokia had bought Navteq, the leader in assisted navigation ahead of TomTom, with offline navigation, the largest map catalog on the market and an interface on par with Google. The contrast with the Apple Maps fiasco helped reinforce the argument: Google assigns thousands of workers to its maps, while Apple couldn't replicate it in a year.

Skeptics replied that the problem wasn't maps, but the operating system, and that the sum of the parts wasn't enough if the business didn't sell.

Windows Phone 8: the upside and the burden

Microsoft's system landed with 100,000 apps, a figure that, as noted in the thread, reached 125,000 in a month. Nokia, HTC and Samsung made devices for the same platform, so the real fight was to stay ahead of rivals with an identical system. The console comparison lingered: the Wii was technically the worst and ended up dominating the living room.

The flip side was distrust of Windows. Criticisms pointed to few apps, many paid, a bad security fruta after years of slow versions and the inability to expand memory on the 920. Some recalled years of Windows Mobile and compared it, unkindly, with BlackBerry or Android. The awkward question: why fight in smartphones with less than 10% share instead of attacking the enterprise market, where the desktop was still Windows.

Accounting: the P/E versus price-to-sales tug-of-war

The second half of the analysis got into numbers. Its author, who said he worked in equity research, argued that P/E was not the relevant ratio and that price-to-sales was more relevant, and stressed that Nokia was a company “with lots of cash.” The discussion turned into a tug-of-war over which ratios really work: some defended the historical weight of P/E, others replied that citing them without understanding them is worthless. The author himself complained that barely one forum member came in to discuss accounting with him.

Third-quarter results and the 9%

The accounts arrived and were not the disaster expected. Earnings per share came in at -$0.09 versus estimated -$0.13. The net cash position fell to €3.65 billion, above the expected €3.30 billion. Lumia sales fell, but less than antiestéticared, and the Asha models sold, in the analysis's words, “like hotcakes.”

Then, the Lumia 920 sold out in China in 20 minutes, with queues of buyers, and the stock jumped almost 9%. In the United States it was $100 cheaper than the Galaxy S3. If it did “just a little well,” the bullish side argued, it would be heading for €3–3.5.

Microsoft buys Nokia's phone business

In September 2013, Microsoft bought Nokia's devices division. It changed the whole story. For some, the software giant was late to the phone business, but backed by an industry veteran and with room to take on iOS and Android. For others, the deal left the shares looking set to end at zero within five years, already dependent on who would replace Ballmer.

The author of the analysis insisted the thesis was never “Nokia will be Apple,” that it was bought because it was beaten down and that the bulk of the idea was in the assets. He added a sensible warning: don't buy a stock just because a third party says so, and don't trust technical analysis for this type of bet.

The initial calculation didn't require Nokia to lead phone sales; it was enough that it stopped sinking. In the thread there was already speculation that one of the giants, Samsung or Microsoft, would eventually make a takeover bid for the company, though no one put a date on the deal. With the devices business now out of its hands, was there anything left to sustain that price?