Investing in Nokia (NYSE:NOK) is anything but exciting for investors seeking a 5G supplier. The communications equipment supplier is in a long-term bearish phase due to years of overpromising and under-delivering. In the last month, sentiment shifted to favor Nokia stock.
The improved quarterly earnings and news of 5G deployments are lifting Nokia’s prospects. Investors have more reasons to hold Nokia and to view it as a strong 5G play.
5G Deals Lift Nokia Stock
Nokia announced the deployment of the first 5G low band in a test environment. Together with Vodafone (NASDAQ:VOD) Hutchison Australia, the firms will roll out their 3.5 GHz 5G. When promoted to a live environment, the VHA network will get better indoor coverage. Customers will also get high-speed 5G connectivity.
If the launch succeeds, Nokia will get positive coverage of its AirScale product. And Nokia Global Services will experience improved bookings for the installation and servicing of the product.
Strong First Quarter
Nokia reported 70 commercial deals and 21 live networks for 5G. For full-year 2020, it forecast non-IFRS earnings of 0.23 EUR a share. The operating margin will improve to 9%. In the near-term, Covid-19 will harm the current second quarter.
In the second half of the year, Nokia expects strong seasonality will offset the near-term slowdown. Operationally, the company shifted much of its staff to work from home. This resulted in the company reporting improved productivity. Research and development staff not only met its roadmap schedule but as CEO Rajeev Suri noted, “some key software release are proceeding ahead of schedule.”
Nokia said that executing in mobile access, or 5G, generating cash, and securing long-term value are its three objectives for 2020. To deliver on profitability in mobile, Nokia will continue to cut costs. So far, its gross margin improvements and 9% target suggest it will exceed this goal. Its ReefShark (“5G PBR”) accounted for 17% of its 5G product shipments in the first quarter. Continued R&D efforts on the product should lead to sustained shipment growth through the end of 2022.
Nokia posted a 5G win rate of over 100% outside of China. Including China, the win rate is in the mid-90% range. This is an exceptionally strong performance result. Given the competition it faces from Chinese firms, Nokia is poised to grow its market share in 5G.
4G to 5G Transition
Nokia ended 2019 with around 27% of the 4G+5G mobile radio market share (excluding China). As it wins more contracts, markets will have to bid Nokia stock at higher valuations. Currently, investors are only willing to pay around 11 times forward earnings.
Conversely, Cisco Systems (NASDAQ:CSCO) trades at 14 times forward earnings. Ericsson (NASDAQ:ERIC) also trades at the same valuation. Nokia’s sentiment score (based on Stockrover’s analytics) rose to 96/100 after the stock bottomed at below $2.30 and built an uptrend from there. The growth score is a modest 79 and will increase as 5G orders grow.
Investors who forecast revenue growing by at least 1.5% annually, with peak revenue growth of 2.7% in fiscal year 2022 will value Nokia at over $6 a share. In this five-year discounted cash flow model, assume the following revenue growth:
|(EUR in millions)||Input Projections|
|Fiscal Years Ending||19-Dec||20-Dec||21-Dec||22-Dec||23-Dec||24-Dec|
|% of Revenue||10.70%||11.60%||13.20%||11.00%||12.00%||12.00%|
In the above model, I assume revenue falling slightly due to the lockdown disrupting the business in the first half of this year. Orders pick up above 2019 levels the following year as customer business recovers and network upgrades accelerate.
In the short term, Nokia has too few stories to share to lift the stock. Conversely, in the long term, the company has tremendous upside potential and will reward investors betting on its growth in 5G. As markets look beyond its Q2 results, the stock may re-visit its $5 range later this year.
Chris Lau, contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. Disclosure: the author owns shares of Nokia. I discuss Nokia’s 5G growth prospects in my private community on the DIY Value investing marketplace.