Nokia (NYSE:NOK) is one of a handful of global players with an opportunity to dominate the 5G market. The future of technology is 5G. This new form of wireless communications will change how we live, work and play in ways that were never thought possible before now. The current state of 5G stocks is not good, with many looking overvalued, but what about NOK stock?
Nokia stock rallied roughly 90% since its lowest point in October 2020. But shares are still trading at 15.4x forward price-earnings. That is not expensive considering the competition out there.
Consequently, it might be worth getting on board while the price remains undervalued – there’s no guarantee that this will stay true in the future.
The 5G rollout is supposed to provide a sustained period of growth for Nokia moving forward. The long-term picture for Nokia is bright, with five years of growth still left in its current product cycle. Suppose Nokia can manage to continue innovating and keep supply issues at bay. In that case, investors will likely enjoy another opportunity to buy shares on the cheap soon enough – especially since there doesn’t seem like any reason why this company couldn’t maintain its reputation as a top 5G player.
Even more impressive is that Nokia can grow its margins while increasing spending on research and advertising. This shows how well-prepared management has been regarding the economic climate lately and indicates what may happen moving forward.
Combining all these factors makes me believe the future is very bright for NOK stock.
Several Positive Developments Are Helping Momentum
Nokia reported solid earnings for the third quarter of 2020, with revenue rising from $5.99 billion in the third quarter of 2020 to $6.1 billion in the third quarter of 2021. The company’s gross margins rose from 37.1% to 40.7%. Its operating margin improved to 9.3% from 6.6%.
Due to its solid operating margins and asset-light business model, Nokia managed to double EPS to from 3 cents in Q3 of 2020 to 7 cents in Q3 of 2021. The goal for Nokia’s segments is a 15% to 20% return on invested capital moving into 2023. Nokia will achieve this by investing in new technologies that will drive growth.
Nokia management is looking to aggressively spend on research and development to improve the company’s product offerings. The company is winning contracts left, right and center in China and doing very well in Western countries.
Chinese telecom giant Huawei is the casualty. The U.S. government’s decision to boycott Huawei has significantly impacted Nokia. There are just a few dominant companies in the mix at this point. And they will happily pick up the spoils due to Huawei’s loss.
Nokia is extending a significant number of contracts in Eastern Europe. Separately, Nokia has completed its deployment with Taiwan Mobile. This was an interesting feat given the poor China-Taiwan relations.
Nokia has strong growth prospects outside of the Asian region. It is expected that its communications service provider 4G and 5G radio access will be at a higher level across North America, Europe, Africa and the Middle East. We should also see increased demand for data streaming services in both developed countries and emerging economies such as India, where internet usage continues to grow exponentially every day due largely to a tech-savvy youth population.
Valuation Sets the 5G Giant Apart
The Reddit subgroup r/WallStreetBets took a liking to Nokia stock in 2021. Members tend to target nostalgic companies with high prices and those that are struggling. However, the price movement does not even remotely compare to GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC). Despite decent rallies in the last few months, Nokia is largely a steady stock trading based on solid fundamentals.
Nokia has found success outside of the traditional mobile phone industry, focusing on other projects. Most notably, Nokia’s AirScale portfolio is expected to be a leader in future 5G networks and services. Nokia currently owns over 3,500 5G-related patents. This is the most in the industry and has reasonably geographically diverse revenue exposure.
Management is now focused on emerging technologies like 5G, cybersecurity and AI-powered automation to grow business globally while maintaining profitability with single-digit margin growth year after year. Considering Nokia is not a new name, investors might want more growth. However, for those looking for stability, few companies are better. Additionally, its proactive management ensures it will not fall back in the 5G race as it did with Apple (NASDAQ:AAPL) in mobile phones. That is a painful memory for both the company and investors.
Pekka Lundmark is a well-known CEO in the mobile industry. He’s had nearly two decades of experience leading companies. When he took the helm in 2020, everyone breathed a sigh of relief. His tenure so far is great. And he has publicly stated the need to remain agile in the 5G space. Recent earnings reports indicate that management is hitting the right beats. The fact that markets are not acknowledging the performance is great news for a value investor.
NOK Stock Will Not Remain Cheap Forever
After a long and successful history as a mobile phone maker, Nokia made an interesting pivot to provide network solutions for clients worldwide. This move seems like it will be profitable in terms of revenue growth. With the shift to 5G telecommunications infrastructure, Nokia can finally offer their customers something different from mobile phones and hardware.
The growth has slowed, but Nokia is still a name to watch out for. NOK stock was mostly flat over the past five years aside from an increase this year, thanks in part to Reddit threads. Despite the blips, shares are still trading at a decent discount compared to other prominent 5G players.
However, it is just a matter of time before investors take note of its positive performance and excellent fundamentals.
On the publication date, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. You can check out his analysis on InvestorPlace and TipRanks.