Nokia (NYSE:NOK) reported stronger-than-expected second-quarter results on July 31, driven partly by the difficulties of Huawei and increased fiber deployments as a result of the pandemic. In previous columns, I had predicted that Nokia stock would benefit from those trends.
With Nokia likely to benefit from multiple positive drivers and the valuation of Nokia stock still quite low, long-term investors who haven’t yet already done so should buy the shares.
Better-Than-Expected Results
Nokia’s Q2 earnings per share came in at .06 euros, versus analysts’ average outlook of .03 euros. The company’s operating margin, excluding certain items, was 8.3%, versus the mean estimate of 4.7%.
The European company’s Q1 free cash flow came in at 265 million euros, up from a free cash flow loss of 1 billion euros during the same period a year earlier. Nokia reported revenue of 5.9 billion euros, 220 million euros below analysts’ average estimate.
Nokia’s former CEO, Rajeev Suri, explained that the company took steps to reduce its low-margin services revenue, particularly in China, and that the novel coronavirus reduced revenue generated by a number of Nokia’s businesses.
But Suri said he expects most of the revenue lost due to the pandemic to be realized in the future. And Nokia increased its fiscal 2020 EPS guidance, excluding certain items, to 0.25 euros from 0.23 euros and raised its 2020 operating margin guidance, excluding certain items, to 9.5% from 9%.
Huawei’s Woes Are Helping Nokia
In a previous column, I predicted that the Trump administration’s ban on the use of chips made with American equipment by Nokia’s Chinese competitor, Huawei, would greatly help Nokia. That call looks to have been correct, as the company’s revenue from communications service providers rose slightly in Q2 versus Q1, despite the pandemic.
Moreover, Nokia reported that it remained on track to meet its goal of obtaining a roughly 27% share of the 5G market by the end of this year. It also noted that its 5G win rate, which measures its conversion of its 4G customers into 5G technology, remained “over 100% outside of China.” The rate can be over 100% because the company signed deals to provide 5G infrastructure to customers with whom it did not have 4G contracts.
Meanwhile, the operating profit of the company’s Networks unit, which includes its 5G business, came in at 249 million euros, excluding certain items. That was more than 100% higher than the 119 million-euro operating profit of the same unit, excluding those items, during the same period a year earlier.
And despite the negative impact of the pandemic, Nokia’s overall revenue last quarter from North America and Europe were unchanged and fell just 2%, respectively, versus the same period a year earlier. Huawei’s problems are likely to have a major effect on North America and Europe.
Finally, on Nokia’s Q2 earnings the outgoing CEO, Suri, stated that, “when we look {at} approved {5G) deals that will be executed in the future, we see an uptick in projected gross margin, operating profit and return on capital employed compared to earlier periods.”
Although Suri stated that those positive trends began in Q4 of 2019, I think they likely reflect the impact of reduced competition from Huawei amid its difficulties with Washington.
In a separate area, Suri noted that, as I and others had predicted, the pandemic did help the company to a certain extent. Specifically, Suri noted that the revenue of the company’s Fixed Networks business rose about 5% on a year-over-year basis, excluding China, while the unit’s overall profits were “robust.” Suri added that its “orders improved on a year-on-year basis and we have visibility to longer-term opportunities, particularly in fiber deployments that stem from the response to Covid-19.”
Finally, the sales of the company’s Enterprise business, which was boosted by 5G deals, along with its webscale and private wireless offerings, jumped 18% YOY, excluding currency fluctuations. The unit’s results were likely boosted both by Huawei’s problems and the pandemic.
Positive Trends Going Forward
Asked directly about the impact that Huawei’s difficulties are having on Nokia, Suri said, “We’re seeing several countries consider their 5G technology event with options. I think Europe is, clearly, one of them, where there’s probably most of that momentum.”
The CEO indicated that Huawei’s difficulties have already helped the company expand its market share in Canada and Japan and make a deal with Vodafone (NASDAQ:VOD). So, it sounds like Huawei’s problems will continue to help Nokia going forward.
Also likely to help Nokia going forward, as I noted in my previous column on Nokia stock, are technological changes that the company is making to its 5G offerings that are reducing their cost and power consumption. Specifically, by the end of the year at least 70% of the company’s 5G baseband and radio units will incorporate the company’s new Reefshark chips which are cheaper, more productive and consume less power, Suri reported.
Meanwhile, I continue to believe that Nokia’s performance will improve under the company’s new CEO, Pekka Lundmark, who took the helm on Aug. 1. Finally, as I noted in my previous column, I’m bullish on the company’s decision to enter the $15 billion data center switch market.
The Bottom Line on Nokia Stock
The shares continue to have many strong, positive catalysts. Trading at a forward price-earnings ratio of less than 18 times, they remain worth buying for longer-term investors.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, Larry did not own any of the aforementioned stocks.
