Technology Never Sleeps

Technology Never Sleeps

Baby Boomers out there may recall the late 1970s Neil Young album entitled “Rust Never Sleeps,” featuring the title track “Hey, Hey, My, My.” If you do, you might also recall the distortion-fraught guitar tracks that back up Young as he wails, “Hey, hey, my, my. Rock and roll will never die.

If this rock history reference means nothing to you, don’t worry about. I’m only bringing it up because the title of Young’s album reminded me of a similar truism: “Technology Never Sleeps.” In fact, technology never even takes a nap; it powers ahead, minute by minute, day by day, year by year.

Even though tech never sleeps, tech stocks sometimes do.

We’ve seen evidence of this in the wavering tech sector: The Technology Select Sector SPDR Fund (XLK), which tracks the performance of the major tech stocks in the S&P 500, has slumped 15% from the all-time high it hit late last year.

But, tech stocks, fueled by the sheer power of technology itself, always “wake up.”

And when they do, you want to be ready for it…


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A Dreamlike Power Trend

One illustrative case study of long-slumbering tech stocks would be Nokia Corp. (NOK).

Even though the company’s technological progress never slept, its share price spent more time snoozing than a housecat. In fact, its share price today is no higher than it was one decade ago.

But now that the company is (finally) delivering impressive earnings growth, its stock appears to be reawakening. During the last 15 months, Nokia shares have gained 25%, even though the Nasdaq Composite has slipped 10% during that timeframe.

Much of Nokia’s recent earnings growth derives from the “sleepless” progress of communications networks…

I’m talking about 5G.

On July 21, the company reported a “surprisingly” strong second quarter result that featured robust North American demand for 5G infrastructure and technology.

Importantly, Nokia’s two largest divisions, Mobile Networks and Network Infrastructure produced a combined 14.5% jump in sales year over year. This outstanding performance enabled Nokia to boost its operating profit 16.5% year over year.

Thanks to these solid results, Wall Street analysts have been erasing their old earnings estimates and penciling in higher ones. The latest consensus numbers call for Nokia to earn about $0.44 a share this year and as much as $0.50 in 2023. At those levels of profitability, the stock would be selling for 12 times current-year earnings and 10 times next year’s result.

When commenting on the second-quarter result during the earnings teleconference, CEO Pekka Lundmark remarked…

[W]e continue to see strong investment trends in connectivity, particularly into 5G and fiber deployments. And those investments are very important for many of our customers to cope with increasing data consumption and the need to increase productivity, which networks enable… [W]hen we look at what we are seeing today… and hearing from our customers, the plans for 2023 seem to be pretty strong.

Lundmark also emphasized repeatedly during the call that the 5G boom is still in its infancy…

We have to remember that there are countries and regions which haven’t even really started in 5G yet… the global penetration rates for both fiber and 5G excluding China remain low. For 5G sites globally, it’s around 15% and even in some of the more developed markets, less than 25%… So that’s why we do believe that we are still early in the 5G cycle… [T]his does not mean that we would be immune to any macroeconomic cycles… [But] the underlying… secular trends should continue to be there for quite some time…

Within the overall 5G market, the Nokia team is especially optimistic about the growth potential of the enterprise market – i.e., private networks for businesses and government entities.

At present, the enterprise market contributes only 7% of Nokia’s total sales. But the company expects that percentage to swell into double digits over the coming years.

Again from Lundmark…

[O]n the enterprise side, we do see enterprise investment accelerating… And as we have said many times, only a small part of the enterprise or industrial digitalization potential has been captured yet. And this is something that we expect to be a mega-trend in the world…

Nokia’s enterprise customer roster has soared 170% over the last two years – from 180 to 485.

a chart depicting how Nokia Corp. has increased its base of enterprise customers by 170% over the last two years (dates ranging from March 2020 to March 2022)


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A Pleasant Awakening

Clearly, boom times have arrived at Nokia HQ. But the company’s recent success has certainly not been the overnight variety. Anything but.

Nokia has been investing nearly $5 billion per year over the last two decades to create and/or maintain a competitive advantage. Although that massive, multi-year investment has yielded a long list of patents and valuable licensing deals, it has not generated the type of revenue and income growth the company had hoped to achieve… until recently.

But now that a great, big 5G boom is underway, Nokia is finally starting to reap a bounty from its long-term research and development efforts.

As this new reality becomes increasingly obvious to investors, Nokia’s share price should begin attracting a larger and more enthusiastic fan base… and a much higher valuation.

Regards,

Eric

On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, here.


Article printed from InvestorPlace Media, https://investorplace.com/smartmoney/2022/08/technology-never-sleeps/.

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