Nokia Stock Is Riding the 5G Wave. Why the Rally Could Continue.

Nokia is one of a handful of companies that makes telecom equipment to support faster 5G technology.


Courtesy of Nokia

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There aren’t many European stocks as hot as

Nokia

this year.

The U.S.-listed shares (ticker: NOK) of the Finnish telecom-equipment maker have surged 60% this year to a recent $6.28. The story is simple enough—telecom operators around the world are upgrading their equipment to support faster 5G technology. Nokia is one of a handful of companies to make that equipment, and a key rival, Huawei, is blocked from the U.S. and a number of other Western countries over national-security concerns.

The more complicated story is that Nokia is recovering from a period of underperformance. Earnings per share more or less held constant between 2014 and 2020, and it didn’t pay any dividend in 2019 or 2020. Nokia said it made a product design mistake when it started making microchips for its 5G products, and

Verizon Communications

(VZ) opted for

Samsung

instead of Nokia on a critical 5G contract.

Nokia said in its second-quarter earnings call that customers have returned. In the U.S., Verizon is still a key customer, and it has signed five-year deals with

T-Mobile

(TMUS) and

AT&T

(T). But competition is fierce—Swedish rival

Ericsson

(ERIC) won a slice of a joint 5G contract from

China Telecom

(0728.Hong Kong) and

China Unicom

(0762.Hong Kong) that Nokia tried to land.

Nokia also says it’s benefiting from the work-at-home trend. “We do believe that there is some kind of structural underlying changes in the market, especially in home [broadband] connectivity,” CEO Pekka Lundmark told analysts, according to a transcript from S&P Global Market Intelligence.

But Lundmark also added that by the second half of 2021, Nokia will face tougher comparisons in mobile network developments. “So don’t just automatically assume that these percentages will continue. But structurally, [it’s a] good market going forward,” he said.

Like other meme stocks, Nokia has been a favorite among retail investors and Reddit users in recent months, and the year-to-date stock gain marks its best annual performance since 2013.

Analysts are focused on 2023, when Nokia aims for an operating margin between 10% and 13% on sales growing faster than the market. Management was asked on the call why it isn’t upgrading guidance; Nokia said it was too early to change a target it set only four months ago. According to FactSet, the ratio of Nokia’s enterprise value to earnings before interest, taxes, depreciation, and amortization, or Ebitda, is 10, compared with a median of 17 among competitors.

For the quarter, Nokia posted sales of 5.31 billion euros ($6.3 billion), up 4%—or 9% when adjusted for currency fluctuations. The consensus was €5.16 billion. Adjusted earnings per share were 9 euro cents, up from 6 euro cents a year ago and above the consensus of 4 euro cents.

Lundmark says a new, simplified organizational structure is paying off. “In the earlier setup, we had actually multiple…


management team members being partially responsible for one mobile network deal. Now it’s all in the Mobile Network business, and Tommi [Uitto] is fully responsible for that. So that is already showing its [positive] effects,” he said.

J.P. Morgan analyst Sandeep Deshpande reiterated an Overweight rating on Nokia after the earnings report. He noted that the mobile networks business saw its gross margin surge from 31.1% in the first quarter to 38.9%, if a one-time software contract is excluded.

When Ericsson turned around its networks business, margins rose from a low of 31.6% to 40.4%. “We don’t see any reason why 2Q ’21 is not a similar milestone for Nokia,” he said.

Roy Walsh

Roy Walsh

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