Is Nokia worth less than Skype?

Yesterday Nokia warned that its guidance for the quarter and the year were “no longer valid.” The surprise to me is that management was surprised. In February I warned that even if Nokia could fool consumers into buying products whose platform was publicly executed, distributors and operators would not likely go along with the deception. Pricing collapse is the proof of a channel breakdown.

That seemed predictable. What I struggled with was how Nokia itself could present such an optimistic forecast. Absent any explanation, Nokia’s forecast of robust sales for Symbian products into the near future belies a failure of understanding of the dynamics of platforms and especially the impact of destruction of trust and brand value that commenced in February. Distress is a slippery slope and it does not model well in a spreadsheet. It takes a leap of non-linear faith to predict the piling-on effect on the up- and the down-side.

Faith in the company’s guidance meant that the market reacted to the bad news by discounting Nokia down to a market cap of $26.7 billion. One analyst even cut his target price down to $4/share, 57% of yesterday’s close. How can this fair? What is Nokia’s phone business worth?

Here’s a quick sum-of-the-parts analysis. After yesterday’s hair cut Nokia’s overall enterprise value is about $20 billion. The Navteq part of the business (purchased for $8.1 billion in 2008) could get a value of $3 billion (based on about 3x sales) and the value of Nokia Siemens networks could be at $6b (less than 0.5x sales). That makes Nokia’s phone business worth about $11 billion.

An alternative view based on “the Motorola case study” $4 target price would imply an overall enterprise value of $11 billion. This either makes Navteq and NSN worthless and Phones worth $11 or it makes the phone business worth a lot less than $10 billion. Perhaps less than $8.5 billion which is what Microsoft paid for Skype. Should we be shocked? Nobody would argue that Nokia is worth more than Facebook so who’s to say that Skype or Twitter aren’t more valuable than a device company in crisis?

I don’t try to predict the market’s behavior, nevertheless, the markets are now very skeptical that there is much in Nokia to salvage. It’s perhaps unfair and illogical but this is the end game of disruption. It ends much more suddenly than it begins. It’s the consequence of nobody noticing the beginning that makes the end so shocking.