Nokia (NYSE:NOK) has had its ups and downs. Nokia stock plummeted to 7-year lows in March, but has now recovered all those losses and is in the green year-to-date. Of course, it isn’t completely without reason.
The 5G roll-out story has been a messy one. Every time it seems like it’s starting to pick up speed, something has gone wrong. Last year, it was underwhelming debuts in South Korea and U.S. stadiums. And this year, the novel coronavirus caused many companies to delay planned investments in the sector. As such,
Q2 earnings are adding to the turnaround. Investors knew that the networking equipment companies weren’t going to have great quarters.
The cellular providers simply didn’t have the incentive to spend heavily at this time. With the virus-induced economic slowdown in full effect, companies had every reason to push back spending. The general consensus was that a lot of capital expenditure timelines were going to get bumped into 2021.
With the backdrop in mind, Nokia’s most recent quarterly earnings were surprisingly good. They weren’t perfect by any means, but it could have been way worse. And, most importantly, Nokia saw meaningful improvement toward the end of the quarter and raised guidance going forward. Here’s what has Nokia stock owners excited.
Earnings and Nokia Stock
For the second quarter, Nokia’s revenues fell 11% to 5.1 billion Euros. At first blush, that doesn’t sound great. The weakness was broad-based, with double-digit declines occurring across several operating segments.
However, according to management, the company has seen more than half a billion Euros in deferred spending due to the pandemic. Add that back in, and revenues would have been up meaningfully. To that point, Nokia says the actual underlying market momentum is stronger than it had expected, and as such, it raised full-year guidance. While Q2 missed out on some sales with the global economy shut down, expect that revenue to come surging back later this year.
Even with the revenue miss, earnings came in twice as strong as expected, with the company earning six cents a share for the quarter. That’s not a blowout number by any means. But don’t forget that Nokia has previously struggled with profitability.
Now it’s putting up a solid better-than-expected result during the height of a global recession. And with all those deferred revenues set to come in later this year, Nokia should enjoy an earnings surge in the coming quarters.
Profits Margins Boost Nokia Stock
Perhaps the most impressive takeaway from Nokia’s earnings release was its margins profile. For the quarter, its gross margin surged from 36.3% to 39.4%.
That’s a tremendous 310 basis point margin improvement, driven by higher sales of 5G equipment. Rising margins are vitally important to Nokia’s long-term outlook, and a huge validation of management’s strategy.
Many companies in turnaround mode would deeply discount their goods during a recession to keep the numbers up. Nokia didn’t have to resort to price-cutting to keep its inventory moving though. And its ability to keep profits up during the recession speaks most positively going forward.
If Nokia could hold the line during this crushing economic environment, imagine what they’ll be able to do with a more healthy global economy.
NOK Stock Verdict
For months now, I’ve been saying that Nokia and Ericsson (NASDAQ:ERIC) are good investments, but that some patience would be required.
It looks like the fruits of that patience are now paying off. Ericsson shares recently broke above $10 and reached new multi-year highs. Meanwhile, Nokia, up here at $5, is within 10% of its 52-week highs as well.
The big picture remains that the U.S.-China diplomatic impasse continues. A new controversy over TikTok’s operations has further deepened concerns.
The U.S. government doesn’t want products from Huawei threatening national security, and the government has successfully convinced various allies to ditch Chinese networking gear as well. This is creating a solid tailwind for Nokia and Ericsson.
And sure, the virus is a bit of a complicating factor. A lot of network upgrades that should have happened in 2020 are now getting pushed back to 2021 or 2022.
That’s hardly a disaster though, as more and more of that business is being routed toward Ericsson and Nokia rather than Asian suppliers. Earnings could still be bumpy due to the pandemic. However, it appears Nokia has clearly passed through the worst of the storm and its shareholders can look forward to a rising trend in the coming quarters.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no position in any of the aforementioned securities.
