A decade ago, the performance of Nokia (NYSE:NOK) stock was determined by mobile phone revenue … especially smartphone revenue. The Nokia of today looks very different from that company, but once again, the performance of NOK stock is tied closely to a changing mobile market.
This time it’s not smartphones (they’re a blip on the bottom line for the company), but 5G network equipment. Nokia is in a race against other telecommunication network giants to supply the gear needed for the ramp-up to 5G cellular service. And for the foreseeable future, the performance of NOK is going to reflect the company’s success in winning that race.
The Battle for 5G Supremacy
The roll out of 5G smartphones and the networks to support this next-generation wireless standard is all but impossible to avoid. Advertising for 5G is everywhere. It’s being promoted as a revolutionary upgrade for smartphones, a must-have for autonomous cars and a potential disruptor in the home high-speed internet market. And there’s an expectation that 5G will enable other applications that aren’t even on the drawing board yet.
In an interview with LiveScience, Harish Krishnaswamy, an associate professor of electrical engineering at Columbia University says:
“I think 5G will have a transformational impact on our lives and enable fundamentally new things … What those types of applications will be and what that impact is, we can’t say for sure right now. It could be something that takes us by surprise and really changes something for society. If history has taught us anything, then 5G will be another example of what wireless can do for us.”
Nokia is a leader in 5G networking technology, but it’s going up against formidable competition in Ericsson (NASDAQ:ERIC), Samsung and China’s Huawei.
Huawei seemed to be in trouble after the U.S. banned use of its 5G networking gear by American telcos. However, Huawei has been making headway in Europe, despite the U.S. restrictions. At this point, Ericsson is in the lead with 86 commercial 5G contracts globally. Nokia’s last published figures showed 63 contracts for 5G commercial equipment. Last October, Huawei said it had 65 signed commercial 5G contracts.
Network equipment has been a minor business for Samsung in the past, but the South Korean manufacturer is ramping up its efforts and beginning to win 5G contracts.
Network Revenue Doesn’t Match Prior Smartphone Success
Looking back at 2009, when Nokia was still a mobile phone powerhouse, the company’s smartphone division alone delivered Q4 revenue of 8.18 billion EUR. Its operating profit on that smartphone revenue amounted to 1.22 billion EUR.
Fast forward a decade to Q4 2019, which Nokia reported in February. The company’s network division (including 5G) brought in 5.4 billion EUR. That’s approximately 79% of NOK’s total revenue. Operating profit for the network division amounted to 671 million EUR.
5G network sales are clearly key to Nokia and a primary driver of NOK stock’s value. But compared to a decade ago? 5G networking doesn’t come close to matching the revenue levels or the profitability of smartphones.
Bottom Line on NOK Stock
While it’s not exactly winning the 5G race, Nokia hasn’t been left in the dust either. However, as InvestorPlace contributor Todd Shriber points out, that 5G revenue has been coming with “dreadful” profit margins.
The investment analysts polled by CNN Business have Nokia rated as a consensus buy, with a 12-month $4.91 target price that offers significant upside. That target price needs to be taken with a big grain of salt, though. Sure it’s over 90% upside compared to today, but compared to the $4.41 NOK was trading for just prior to the market meltdown? That’s a much more modest 10% upside.
Whatever your take on Nokia, it’s clear that for the next few years at least, 5G revenue is going to be key to the price of NOK stock.
Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015. As of this writing, he did not hold a position in any of the aforementioned securities.
