Speculator’s Corner: Microsoft’s (MSFT) Big Hardware Gamble

| September 11, 2013

The big news in the corporate world last week was Microsoft‘s (MSFT) purchase of Nokia‘s (NOK) phone business.  This game changing deal has certainly gotten a lot of press.  So now, it’s time for my take on the year’s most important acquisition.

To be more specific, I’m going to defend MSFT.

You see, most of what I’ve read about the deal has been negative.  And, much of the negativity is based on what many analysts view as an insurmountable lead by Apple (AAPL) and Google (GOOG) in the mobile device space.

Apple, of course, has the ultra-popular iPhone.  Google has the most popular operating system for smartphones – Android.  And yes, both companies do control the lion’s share of the market.

MSFT’s Windows operating system is in a distant third place for mobile devices – and hasn’t been gaining any significant ground despite new products.  Plus, MSFT didn’t have any hardware to call their own, only licensing deals.

Until now.

Microsoft’s management addressed their lack of in-house hardware by purchasing the once dominant phone business from Nokia.  In fact, Nokia still produces the second most handsets globally.

Here’s the thing…

MSFT isn’t clueless when it comes to hardware.  They’ve been very successful with the Xbox game console.  And, it only takes one killer product to change a company’s fortune.

Just ask Apple.  The company was barely surviving before the success of the iPhone.  But unlike AAPL, MSFT isn’t in any danger of irrelevancy.  Their complete dominance in PC operating systems provides plenty of cash flow.

Speaking of cash, MSFT shelled out $7.2 billion for Nokia, which many analysts seem to think is excessive.  But, the company was sitting on over $77 billion in cash.  So, they’ll hardly notice a dent in their coffers.

Here’s another interesting point…

MSFT lost roughly $20 billion in market cap after the purchase was announced.  Even with the cost of integration, how could this deal result in MSFT being worth $20 billion less? 

The company was already in third in the smartphone industry.  They can basically only get better.  After all, this purchase certainly isn’t going to hurt their market share.

In other words, the worst case scenario for this purchase is status quo.  And, every other scenario should provide some kind of benefit to the company.  I just don’t see how the shares should be worth less in the short-term, minus the cost of the transaction.

Now, it may take awhile for MSFT to figure out how to fully capitalize off the Nokia purchase.  So, if you agree with my thesis, then you may want to consider long-term calls.  Over time, I believe management will find at least some ways to unlock the potential of their new hardware unit – just like they were able to do with the Xbox.

Yours in Profit,

Gordon Lewis

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Category: Stocks

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

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