Bernstein analysts Pierre Ferragu, Jasmeet Chadha and Viral Gandhi give Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V) a market perform rating. More details from their report below.
Also see Viking Global's Short Strategy And Investment Process
The market for map data is structured as a quasi-duopoly, with scale determining structural profitability. As such, these businesses historically defended good returns, but with the development of smartphones, mobile platforms have concentrated end-markets and taken over the aggregation layer of the value chain, destroying the structural profitability of map data providers.
Nokia HERE maps' future
What future for an independent map data and location services provider in that context? The mobile market is confiscated by ecosystems and we can't see how an independent player can be successful there. Other markets (Auto, PND, etc) are slim in comparison and could end up leveraging mobile ecosystem platforms. In this context, we consider the future of Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V)'s HERE bleak and uncertain. In a best case, the segment could deliver €1.5bn in revenues and €160m in EBIT in 2018, and in a less optimistic but very credible scenario, it would struggle to remain breakeven. Lastly, the strategic value of the asset exists, but can't exceed the €1bn region, which is what a strategic investor would pay at a maximum for Tele Atlas, bidding aggressively on Tom-Tom.
Valuation for Nokia
In conclusion, we believe Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V)'s HERE can only be a minor contributor to Nokia's earnings power or sum-of-the part valuation. We maintain our €1bn valuation unchanged and see only downside risks to it. The market for mapping data is structured like other database-centric service businesses, as a quasi duopoly, with scale determining structural profitability. With fragmented end markets, these businesses historically defended good returns, although still inferior to Location Services providers.
Tele Atlas and Navteq used to be the two main suppliers of global map data. In 2007, they produced decent returns on sales and on asset, with scale driving much better returns for the market leader Navteq.
Competitive dynamics
This corresponds to the typical structure of a database-centric service business. Competitive dynamics are characterised by 1) no initial barriers to entry (everybody can accumulate data), 2) strong first mover advantage (difficult to catch up on years of accumulated data), 3) value of scale, and 4) non material incremental costs. This mechanically results in a market concentrated into two players, with usually a material difference in scale and profitability.
A large number of niche map data suppliers nevertheless flourished in the shadow of Tele Atlas and Navteq. This is worth noting in order to understand the recent evolution of the industry.
Nokia HERE unable to generate returns?
On the other hand, Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V)'s HERE could remain a business structurally unable to generate returns. With pricing pressure, an ~80% market share at risk in the Auto segment, and a structurally declining PND market, there is much to lose for HERE, and even a slight pressure from Apple and Google would keep the business at best around breakeven, cornered between the need to maintain spending to keep up with innovation and pressure on revenues (Exhibit 17). We believe this is a very credible bear case.
Lastly, although we don't dismiss the strategic value of map assets, we see only Microsoft Corporation ( NASDAQ:MSFT) and Samsung Electronics Co., Ltd. ( LON:BC94) ( KRX:005930) as potential buyers. It seems that the former did not offer enough to interest Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V), and a move by the latter remains very speculative at this stage. Last but not least, we understand Nokia is not interested in selling the asset in the near term.
In conclusion, we believe Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V)'s HERE is only a minor contributor to Nokia's value, be it as a contributor to earnings or disposed as a strategic asset.
As part of Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V), HERE would contribute a maximum of 4 cents of earnings per share (our bull case). We would see this as an optimistic maximum with a probability balanced with our bear case, in which HERE would stick to breakeven in the long run.
Nokia HERE to attract bids
As a strategic asset, we don't believe Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V)'s HERE would attract bids much above the €1bn region. Tele Atlas is a very similar asset and easy to acquire, as part of the listed TomTom. Assuming a 30 to 50% premium and the product division valued €500m (10x earnings), a strategic buyer would get away with a fully loaded location services platform for between €1bn to €1.3bn. Even arguing a better service platform, we don't see Nokia's HERE business worth more. This, by the way, may explain why Microsoft Corporation ( NASDAQ:MSFT) and Nokia could not agree on a price for HERE...
We maintain our €1bn valuation for HERE, and our sum of the parts valuation of Nokia at €4.5 per share.
Conclusion for Nokia
We maintain our price target for Nokia Corporation ( NYSE:NOK) ( BIT:NOK1V) (HEL:NOK1V) at €4.5, based on a weighted average of the possible scenarios we see unfolding going forward. The only downside scenarios we can come up with (no return of cash, no use of cash for a material acquisition, lukewarm valuation of Nokia's patent portfolio) appear reasonably unlikely and drive limited downside. On the upside, a large return of cash is rather likely and could be boosted by a rerating of Nokia's IP unit, from a bare portfolio generating declining licensing revenues, to a successful innovation and licensing unit.
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