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.