The company has rapidly accelerated as its products and execution have greatly improved under its new CEO.
Moreover, the company continues to have multiple, strong, positive catalysts, while the valuation of NOK stock remains reasonable.
Still, the company is also facing multiple challenges and tough competition. So while I remain upbeat on the shares overall, I don’t expect them to double or triple in the near-term or the medium-term.
Conversely, Nokia is very unlikely to lose a great deal of market share anytime soon, making the stock a very good tech name for more conservative investors.
A Closer Look at NOK Stock
In a July 2000 column on NOK stock, I discussed a number of steps that the Finnish company was taking to improve its technology.
When it came to powering 5G systems, the company, I wrote, was switching from Field Programmable Gate Arrays or FPGAs, which are very expensive, large, and energy-intensive, to cheaper, much more efficient SoCs.
According to a March 23 Light Reading article, Nokia’s phaseout of FPGA chips was well underway, boosting its networks business margins significantly.
Specifically, the unit’s gross margin reached 37% in Q4 of 2020, up from 29% at the end of 2019.
Nokia’s 5G chips are catching up with those of its rivals, and the disparity should disappear next year, a Nokia executive told Light Reading.
Huawei and Nokia
In another previous column on NOK stock, I predicted that the Trump Administration’s efforts to prevent America and its allies from using the products of Nokia’s major Chinese competitor, Huawei, would help Nokia.
I believe that both Nokia’s technology upgrades and Huawei’s difficulties have contributed to the recent improvements of Nokia’s financial results and to the Street’s more upbeat view of NOK stock.
More specifically, in Q1, Nokia’s operating income came in at 431 million EUR, much better than its operating loss of 76 million EUR during the same period a year earlier.
The company’s fixed network sales soared 49% year-over-year, and it expects the revenue of its entire Network Infrastructure unit to climb 4% YOY.
In Q1, Nokia’s companywide net sales climbed 9% YOY, and its operating margin rose to 10.9%. In North America, Greater China, and India, its net sales increased by at least 10% YOY, and it added a total of 63 new enterprise customers YOY.
Last month, signifying the Street’s improved view of Nokia, a Morgan Stanley analyst upgraded his rating on the company’s shares to “overweight” from “equal weight.”
He advised investors to dump Ericsson (NASDAQ:ERIC) stock in favor of Nokia’s shares, as he thinks that the margin gap between the two companies would probably narrow.
The company’s strong Q1 results indicate that CEO Pekka Lundmark is improving the company’s performance.
The 17% YOY decline in its sales, general, and administrative spending last quarter, along with the improvements in its margins, suggest that the CEO is cutting unnecessary costs at Nokia.
Despite Nokia’s marked technology improvements, Ericsson remains at least even with Nokia in most technology, and Huawei is still a tough competitor in many areas of the world.
The Bottom Line on NOK Stock
Since my June 15 column on Nokia, the company’s shares have climbed about 18%. It continues to have strong, positive catalysts.
As a result, I believe that the shares are well-positioned to deliver similar or slightly better gains over the next year or so. Therefore, I recommend that conservative investors buy the shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.