In August, Nokia (NYSE:NOK) surged to $5 per share but the path to move higher from there did not last. Then Nokia stock plunged in September when Verizon Communications (NYSE:VZ) announced that Samsung (OTCMKTS:SSNLF) would supply 5G hardware.
More recently, Nokia stock attracted buyers when it announced big contract wins with several telecom firms globally.
Nokia’s next bold move on the markets, be it up or down, will depend on its next earnings report. It will need to post strong operating cash flow growth.
Nokia Stock Depends on Next Earnings Report
Nokia suspended its dividend when its quarterly profits suffered from underperformance. Last quarter, the company posted strong Q2 results and raised its outlook. It earned EUR 0.06 on a non-IFRS basis. Net cash topped EUR 1.6 billion.
Nokia managed to beat expectations despite the global coronavirus pandemic. Revenue suffered from a sharp decline in China. So, it took a proactive step in reducing the volume of a low margin services business. The decision to go after only a highly profitable business suggests that losing to Samsung is a non-event.
Verizon still needs Nokia to supply open-source 5G hardware that works alongside that of Samsung gear. Samsung may have absorbed a loss by undercutting its prices and taking Nokia’s business. This will help Samsung start establishing a foothold in the 5G networking space. Conversely, Nokia’s addressable market growth will slow but operating margins will grow.
Nokia said that its long term (three- to five-year) plan included dividend distribution to shareholders. It wrote that it would be “an earnings-based growing dividend of approximately 40% to 70% of non-IFRS diluted EPS, taking into account Nokia’s cash position and expected cash flow generation.”
For the full year, Nokia forecast earnings per share of EUR 0.25. In Q2, FCF was positive EUR 265 million. With a “clearly positive” FCF forecast for the year, Nokia is likely to resume its dividend as early as at the end of this year.
Competitor Ericsson (NASDAQ:ERIC) pays a 17-cent dividend that yields over 1.5%. But the company also trades at higher market capitalization and higher forward price-earnings multiple. Markets will reward Nokia shares with a higher multiple and stock price once the company resumes its dividend. This will attract income investors and pension funds to buy its shares.
Simplywall.st values Nokia at $6.30 a share, suggesting a significant undervaluation at current levels. Similarly, a five-year discounted cash flow growth exit model would value Nokia at $6.
|Discount Rate||7.5% – 6%||7%|
|Perpetuity Growth Rate||1.5% – 2.5%||2%|
|Fair Value||$5.18 – $8.15||$6|
Model courtesy of finbox
Nokia’s supply deal with Chunghwa Telecom for 5G small cells in Taiwan is a big win. It will supply small cells to support the firm to provide 5G coverage. On Oct. 9, Telefonica UK will buy Nokia’s SDM (subscriber data management) software from Nokia.
And on Sept. 29, Nokia will become BT’s largest customer. BT’s Nokia-powered network will expand to cover more towns and cities across the United Kingdom. Nokia will supply its AirScale Single RAN (S-RAN). This will give both indoor and outdoor coverage. As a result, BT will deliver ultra-low latencies in connectivity and capacity.
BT benefits by having a more cost-efficient and less complex system. BT should benefit from lower operating and maintenance costs. As a bonus, BT’s 2G and 4G networks will see a performance improvement thanks to Nokia’s solution.
Nokia shares are on sale for a reason: its quarterly earnings are inconsistent and it does not beat estimates all the time. Nokia barely addressed the Verizon deal loss, scaring investors.
When Nokia shows that it did not lose any revenue in the quarter and instead expanded it, the stock will rebound and head toward the $6 range next.
Disclosure: On the date of publication, Chris Lau held a long position in Nokia.