Wednesday, September 4, 2013

The NOK call and MSFT deliemma

The NOK call was the right one. There was value to be had in the organization with such large channels and an enviable customer base. Though I was hoping for a bigger turnaround and not really a buyout. My NOK call options for January popped yesterday and since the thesis panned out I sold them at a good 250% profit. Though I am wondering now if I got out too early and should have waited a couple more days to squeeze the last out of that option.

But the bigger issue at hand is not NOK but what I should do about my MSFT holdings. From a valuation perspective, this thing looks too good to pass over. But there is just too many high profile failures for this stock to have any positive momentum. The high profile failures, mainly in the consumer devices space is not much of a shocker to me and honestly is not much of a concern from a revenue/earnings/multiple perspective. But what is concerning is the repeated sinking of money into businesses that it knows very little about. Admittedly this is being done to protect the core enterprise and PC business, but at some point these big non-performing assets that are being bought with money from the balance sheet is really hurting my view of this company. It also shows a certain level of panic that seems to have set in into the organization and the board in term of what to do next.

Looking at this in a more level headed manner, MSFT can very much afford the 7 billion it paid for NOK and I would argue it is 7 billion well spent outside the US while money is piling up overseas. MSFT also needs to fortify the Nokia story least Nokia gets cold feet and decides to go the Android way. It is arguable, what is better for Nokia, but from a MSFT perspective it was that best thing to do for Windows Phone.

If I were to look at Xbox as an analogy (ignoring Zune or Kin for a minute) Windows Phone still has a couple of years before it gets the time it takes to get into a market that has entrenched players. It would also take MSFT a few more iterations before it gets the platform right, but I do hope they preserve the Nokia organization and keep Elop the head of devices and go find another CEO. Or better yet, make MSFT a dual CEO organization so that they both have equal stake in the game and report to the board independently.

Either way, I think MSFT is too cheap to be downloaded here. Even from a breakup perspective the assets are far more valuable that its current market cap. Maybe around my original DCF of 28 I might add more to it. But for now I am in a holding pattern on MSFT.