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Buy Nokia Stock as 5G Evolution Accelerates

Shares dipped last week after false rumors of a contract loss, creating another good entry on NOK stock

When Nokia (NYSE:NOK) spiked to close to $4.75 on July 2, longtime investors breathed a sigh of relief. Nokia stock had fallen to the $2.30 level at the height of the March 2020 sell-off. Since then buyers slowly accumulated shares in the company.

Dark clouds over Nokia (NOK) brand name on top of a building in Helsinki, Finland
Source: RistoH / Shutterstock.com

The 5G smartphone refresh will strain the existing telecom network infrastructure. And with less competition from Huawei and Ericsson (NASDAQ:ERIC), Nokia is poised to post more 5G contracts this year.

Nokia Stock Dividend

Nokia suspended its dividend last year on Oct. 24, alienating income investors. At the time, it needed to conserve cash and improve its free cash flow. The higher capital expenditures would strengthen its 5G product offering but could not be done with a dividend policy in place.

Nokia’s small non-GAAP earnings per share of EUR 0.01 in the last quarter reversed its poor fortunes. On its interim report, Nokia said it had confidence in its resilient customer base. It posted 70 commercial 5G deals and 21 live networks. It also posted a non-IFRS EPS forecast of EUR 0.23 on an operating margin of 9%.

Nokia already warned that the novel coronavirus will hurt second-quarter results. And because the market is forward-looking, the stock might have corrected to price in the disappointment. Still, the second half is seasonally stronger. Plus, with more telecom customers working from home and after smartphone makers update devices to 5G, Nokia should enjoy bigger orders.

The higher revenue and growing cash flow should let Nokia restore its dividend. It might bring back its dividend later this year or sometime in 2021.

Valuation

Nokia has an overall score of 86:

Overall Ratings Score      86
Growth Ratings Score     90
Valuation Ratings Score 75

Data courtesy of Stockrover Research

Strong growth prospects (and a score of 90/100) suggest that the company will prove rewarding to patient investors willing to ride through the near-term volatility. Further, investors may assign a discount rate of 7.5% in a 5-year discounted cash flow revenue exit model:

Metrics Range Conclusion
Discount Rate 8.0% – 7.0% 7.50%
Terminal Revenue Multiple 0.8x – 1.8x 1.3x
Fair Value $5.34 – $9.50 $7.38

Model courtesy of finbox (click link to change assumptions)

The multiple and rate as shown above take into account Nokia’s historical revenue growth trends and expectations from here. For example, Nokia only needs to grow its sales by around 4% annually. If it does so, the stock has a fair value of over $7.

Last week, rumors that Nokia lost a 5G contract with Verizon Communications (NYSE:VZ) sent the stock lower. Nokia played down reports that it would lose a 5G RAN contract. Even after the response, Nokia shares did not bounce back. Nokia said that it was “proud to serve Verizon, and we are committed to continuing to help them build the best, most reliable and highest-performing network.”

Samsung is a potentially tough competitor to Nokia, so investors are understandably rattled with the risks this Korean conglomerate poses. But Nokia strengthened its Alcatel-Lucent unit in the last few years. It cut staff and lowered operating costs. And it did so without sacrificing on research and development efforts.

Nokia has a compelling network product that telecom providers will want. Investors will need to wait until the company reports second-quarter results to find out how many more contracts it won.

Your Takeaway

Nokia is in a slow turnaround, so its pace of bouncing back will frustrate investors. But at a steep discount, shareholders will not have to worry about holding the stock for the long-term.

The 5G evolution is underway and Nokia will win more supply deals. This will re-accelerate its revenue growth. With expanding earnings per share each quarter, the company will reinstate its dividend and win back income investors.

As of this writing, the author held Nokia stock and may add to the position 72 hours after publication.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/buy-nokia-stock-as-5g-evolution-accelerates/.

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