Nokia's LTE business

Trefis analysis gives a target price of $7.93 to NOK. In its valuation, it is clear that Nokia Wireless Infrastructure and Networks Services and non-core revenue makes up almost 86% of the revenue.

Out of the above Wireless Infrastructure makes up almost 46% of the revenues.

As we know right now, wireless infrastructure is undergoing an upgrade as LTE networks.  As per Gartner, this market is supposed to grow at 18% CAGR from $18B globally to $36B by 2019.

Geographically, the market is split as follows

Among the various vendors the current market share is with Huawei and Ericsson. Nokia plans to correct that with the acquisition of Alcatel's business. The combined business will become the third largest business for a mobile.

However, in terms of capabilities Gartner ranks Huawaei, Ericsson and Nokia in dead heat, with Alcatel behind the pack in vision and execution.

From a books perspective, the acquisition will create an entity with a combined revenue of around $30B, with each entity making 50% of that number. From an EPS perspective though, Nokia made $0.30 where as ALU made $0.05 EPS.

The acquisition would convert each ALU stock to 0.55 shares of NOK, which implies that the combined entity should make $6 revenue per share in the combined entity. Currently revenue per share numbers for Nokia is $4.1. If Nokia can translate its lower cost base and efficiency to the new entity, the company could again become quite profitable. I can easily see the combined entity having a share price between $10 to $12 post-merger.

The business of cloud computing

MSFT, AMZN and Google all reported their recent most quarter, and it was surprising to see a 10% jump in stock price across the board. Like Facebook had crossed a chasm in its transition to mobile a few years earlier, it seems all the above three companies have made the transition to cloud successfully.

The lure of cloud is now obvious in the enterprise. In 2014, large companies spent around $690 per employee in IT spending. Small companies in contrast spent more than $2200 per employee. By transitioning to cloud, large companies can become even more efficient, and smaller companies can operate at per employee costs similar to larger companies.



On the other hand, companies such as Microsoft have figured out, that transition to cloud is inevitable. With the new CEO it has put its plan in motion, and is now beginning to see the results. In the Financial investor conference held earlier in the year (April 2015) it alluded to have a strong adoption by enterprise users.

It then talked about a Product transformation as part of its cloud strategy. As you can see below, there is an emphasis on moving the product components that are deployed on premise to providing more solution components that can be wired together in a cloud environment.

Accompanying the product transformation was a proposed economic transformation that focused on lifetime value of a customer.

Microsoft's finally stated its goal is to make cloud a $20B a year business.

Come October 2015, this was clearly reflected in their recent quarter earnings.

While Microsoft is currently averaging $6B in cloud revenue each quarter, Oracle as well has posted in May that its PAAS and SAAS revenues were around $600M per quarter. Given that Oracle has historically had a decent presence in the corporate data centers, it is likely that these numbers will grow quite a bit.

Benefits for customers

For customers, benefits of cloud are obvious:

1. No need to seek a capital outlay to acquire new hardware and software, instead focus on a rental/ subscription model

2. Less reliance on stretched internal IT resources to setup infrastructure and environment.

3. Reduced implementation time, from years and months to weeks

Earlier seen as a skunkworks initiative in the organization, Cloud has surprisingly become part of main stream IT strategy relatively quickly.

In looking at who was operationalizing the Corporate cloud environments, an Oracle appointed study conducted by Harvard Business Review in 2015 found that bulk of the services were in fact led by IT departments in the organization indicating that everyone including IT had jumped on the cloud bandwagon.

As the transition to cloud becomes more secular it is clear that the companies that will make more money in the near term are companies that will help in the build out of data centers. To me it translates to the following components in a Data center

Computing + Storage + Electricity + Bandwidth = Cloud Computing Infrastructure

This is conformed by Microsoft Research, which states typical costs of cloud data center are as follows:

Based on the above, we can see that the leaders of the cloud revolution are going to be the thought and execution leaders in these spaces. These are as follows (in my opinion)

1. Computing : Intel (INTC)

2. Storage : Storage has a few players (EMC and HP seem the strongest)

3. Electricity: I think the trend in Electricity for cloud will move towards solar given lower recurring costs and environmental benefits. Since the peak electricity charges are more, data centers are better investing in peak power systems such as solar or wind. Google, Microsoft and Apple have negotiated Purchase Power Agreements (PPAs) and an whitepaper from Google explains how this works. Companies like FSLR will benefit from these trends as they are typically working with utility level projects.

4. Network bandwidth: Here the complexity of networks in a data center means much more complex network providers can meet their needs and Cisco perhaps jumps to mind.

All in all, there are a few organizations that will benefit as customers and traditional software companies rush to cloud en-masse.

Medium term market outlook September 2015

Last few weeks have left the market cold. As many analysts have commented much of it was expected. In this post, I analyze the current secular trends and likely impact on markets.

China

Chinese stock market was a bubble, and when it burst, it has wiped out the savings of a lot of common people. For a country that was trying to shift to a consumption based model, the consumers are likely to suspend their consumption for a little while. I suspect the stock market impact on consumer behavior to last 6 to 8 months.

The impact of China slowdown will be felt by commodity producers feeding China as well as consumer discretionary companies targeting Chinese markets for a little while. I expect that the commodity and supplier slowdown to be more secular, as a recovered China will still be focusing more on internal consumption than an export led growth, which will be slower and more sustainable. Thus impact on commodity prices will be more sustained.

OPEC

OPEC has decided to punish the oil oversupply created by fracking in the US. It has tried to do that by increasing production and lowering prices. Even with the impact it has had on the earnings of primary oil producers, OPEC has decided to continue down this path. However, with China and most other economies slowing down and the move away from hydrocarbons as a secular trend, it is not known how sustainable this trend will be. Once oil rises to its natural price, the marginal producers will swing back into action and into viability. This will have an impact on economies such as Canada that had boomed in the era of high oil prices and fracking led production.

Europe

Europe is going through a slowdown. With an aging population and reducing workforce, it is looking at innovation to sustain its economy and looking for ways to reduce its operating costs in terms of energy. European companies that are profitable and innovative will look at entering new markets and perhaps look at innovation to offer superior products and services. Investment on its own infrastructure is likely to be low till it figures out how to get to a more sustainable operating model.

United States

US is currently the global innovation leader. It has dramatically increased and allowed innovation in all areas of its economy including energy, infrastructure, technology, products and services. As long as this trend continues, the US economy will continue to re-invent itself. Inspite of major homeland security threats, two massive bubbles in the past decade and a half, US has shown it can innovate itself out of problems that would cripple or destroy most countries. As its growth is largely innovation led, it will get affected by slowdowns in China and Europe but will maintain a secular growth trend.

The big fear ofcourse seems to be the imminent crash of the debt bubble. The federal reserve seems to be keen to start raising interest rates and that is likely to bring the bond prices down that have gone up in the recent past.

India

The Indian market has also contracted slightly but the economy is growing well. Largely driven by domestic consumption, economy is growing thanks to low fuel prices. However, as oil prices come back up this may get affected slightly.

Conclusion

Based on the above, it seems better to move away from companies that are carrying a lot of debt and focus on innovators specially those with a global footprint.

Analyzing IoT players

Internet of Things (IoT) is the name given to a utopian scenario where inanimate "things" in our surroundings, will become network aware and will start interacting with each other.

IoT Analytics released a list of companies that they analyzed to be creating the buzz around IoT (http://iot-analytics.com/20-internet-of-things-companies/).

Here is the list...

As we can see, this includes some very large players that either became big because of the Internet and Smartphone revolutions, or lost out on it. They can be categorized either as platform companies,  infrastructure companies or consumer companies.

Companies like Intel (INTC) have of course learned that they need to allow a lot of startups and innovators to flourish that eventually become competitors to their partners, if they want to keep customers to keep coming back to them. In the past, Intel waited for partners such as Microsoft (MSFT) to innovate and as a consequence lost out on the smartphone revolution. They still managed to survive in the server space as x86 and x64 became the dominant platform. Microsoft has ofcourse re-established itself as the cloud and Office applications tool company.

Future of companies like Blackberry (BBRY) is more uncertain, who are now trying to become a Platform As a Service (PAAS) for IoT. Companies like Amazon (AMZN) that defined the cloud as we know it today, ofcourse are much further than most.

A big driver of IoT is likely going to be Autonomous and Connected Driving platforms that seem to be gaining a lot of traction in the US. With an aging population who have an unmet need for mobility in sprawling American cities, to the worthy goal of zero fatalities, US federal and state governments are quite rapidly aligning themselves around this initiative. This is a space that may see the first real true IoT implementations as everything from cars to roads and traffic signs all become "smart".

A few companies like Here, earlier owned by Nokia (NOK) who are creating the digital representation of the roads will be equally big. Now owned by a consortium of Mercedes, BMW and Volkswagen, it is clear that these companies are set on ensuring that their future fleets are seen as the epitome of luxury and technology advancement.

Intel: The road ahead

Intel is due to release quarterly earnings later this week. It is likely that due to falling PC shipments the overall revenue falls and has an impact on how the market sees the stock.

Based on Trefis analysis, Intel's current valuation is based on the following revenue components.

We can see that Server, Notebook and Desktop are nearly neck to neck. While server volumes seem to be going up slightly each year, it is unlikely that notebook and desktop replacements will provide the growth that is needed.

The current consensus is that EPS would come in at 2.12 which at Price to Earnings at 12.5 would translate to a target price of 26.5. An EPS of 2.5 or higher could only justify the current price.

This would become clear on Wednesday.

Simplistic Technical Analysis of the Russell 2000 (January 18th 2015)

I am resuming the practice of posting simplistic technical analysis. This time, we are looking at 1 year candlestick chart for Russell 2000 on Yahoo stocks, with the following indicators on the chart.

1. Bollinger Bands at 20 days and 2 Standard deviation
2. 20, 50 and 200 day Simple Moving Averages
3. MACD indicator for 26, 12 and 9
4. 14 day Money Flow Index

We can see that the stock is now trending up with higher highs and higher lows. Also, 15 day Simple Moving Average (SMA) is above the 50 day Simple Moving Average (SMA) which is above the 200 day Simple Moving Average. All these to me are bullish indicators.

Based on above, we can see that the Russell is setting itself up for going higher (highlight 1). The MFI has moved fallen indicating a push higher is imminent (highlight 2). However, the MACD divergence has sloped down indicating that downward pressure is no longer there. Given indicators 1 and 3, it seems these are bullish indicators hinting that the index has room to move higher.

Based on the above, my amateur predictions are as follows:

1. The index will move higher to 1220 to 1250 points within a month from now.

2. The index could push all the way higher to 1280 or beyond by mid March.

Please do your own research before making any financial decisions.