After many quarters of slowdown, Nokia (NOK, Financial) showed its first glimpse of a turnaround. The company is in the process of a big transformation after the replacement of CEO Rajeev Suri and a 5G-focused growth strategy.
The company’s stock crashed in 2019 after weakened guidance and no dividend payouts, causing yield investors to divest the stock. The Covid-19 pandemic and its impact on global markets have made it go down further, and as of March 6, the company trades at low valuations. In my opinion, it seems to have bottomed out. With all the low investor expectations factored into Nokia’s current price, the stock appears to be a good watchlist candidate.
Overview
Nokia is a well-known telecommunications giant from Finland that once ruled the global mobile handset industry. Today, the company is engaged in the network and Internet Protocol (IP) infrastructure, software and related services markets and has two main divisions – Nokia Networks and Nokia Technologies.
The Nokia Networks division is split into two main business segments, which are Ultra Broadband Networks (dealing in mobile networks and fixed networks) and IP Networks and Applications (covers IP and optical networks).
The company also offers software solutions spanning customer experience management, network operations, management, communications and collaboration, policy and charging, Cloud, Internet of things (telecom equipment), security and analytics platforms that enable digital services providers and enterprises to accelerate and optimize their customer experience.
The company is headquartered in Espoo, Finland and continues to employ over 100,000 people across the globe.
A new approach
Nokia recently announced the resignation of CEO Rajeev Suri, which was perceived positively by analysts as well as the markets. Suri will be replaced by Pekka Lundmark, who was previously the CEO of electric services company Fortum and who has been chosen to spearhead Nokia’s turnaround in the 5G battle across the globe. Under the leadership of Suri, Nokia stock lost more than half of its value and went through some tough times with the rising cost of sales, operational inefficiencies and increasing competition from Huawei and other players.
As one can see in the chart above, 2019 was a rough year for both Nokia and its closest Scandinavian competitor, Ericsson (ERIC, Financial), but Nokia faced a much larger decline in the stock price. This was likely the result of weakened investor perception, in my opinion. Nokia slashed dividend payouts and became far more conservative in its guidance under Suri’s leadership, and his strategy of reducing 5G-related outlay meant to counter the competition was negatively perceived by the market.
With Lundmark taking over, there is hope as the company is not only looking at new partnerships but also exploring the option to merge or get acquired. The company entered into a promising partnership with Marvell Technologies (MRVL, Financial) on silicon innovations for 5G under Lundmark to boost Nokia's Reefshark chipsets. This new approach can be perceived in a positive light by investors.
Nokia and 5G
Nokia reported that it won 18 more 5G deals in the fourth quarter of 2019 over and above the 48 networks that it had signed earlier to use its 5G systems and the 15 that have been live already. As per February data, Nokia had signed 68 commercial 5G contracts worldwide, including all four nationwide operators in the U.S. At its rapid signings rate, it is closing in on Huawei’s tally of 91 5G contracts and Ericsson’s total of 81. The company’s 5G win rate has been over 100% outside of China and in the mid 90% range including China, reflecting strong performance. To accelerate this 5G turnaround, the company drew a 500-million-euro loan in February 2020 from its R&D loan facility with the European Investment Bank.
Nokia has extended its partnership with the Iliad Group (OTCPK:ILIAY) for the 5G rollout across France and Italy. It has worked with Iliad in France since 2012 and in Italy since 2018 for the rollout of 3G as well as 4G. The company is working on network modernization and 5G introduction in the two countries, making 5G benefits available to about 17 million subscribers. The Iliad Group is expected to apply Nokia's AirScale radio access technology in order to tap early 5G networks while still supporting 4G/LTE in the same system.
The company has also been selected by Orange (ORAN, Financial) to provide products and services for the rollout of 5G in France. This agreement with Orange grows Nokia’s market share in France while further strengthening its relationship with the company.
In terms of mobile radio products, the management expects Nokia to have a total global market share of 27% after taking into account 4G as well as 5G, excluding China. Another potential upside for them is that Huawei has come under intense political scrutiny in Europe, which has been resisting pressure from the U.S. to ban Huawei from its core networks over fears that China could use them for spying. The British Government has already imposed a cap on Huawei’s involvement. Being a global front-runner in the 5G implementation is certainly going to benefit the investor perception of Nokia and could result in some multiples expansion.
Key takeaways
The negative perception of the markets with respect to Nokia stems from a number of factors, including weakened financials resulting from the rising cost of sales, operational inefficiencies and intense competition. Competition from Ericsson and Huawei on the 5G front has always been perceived as very high and the common belief has been that Nokia is still playing catch-up to its 5G peers. The company also delivered some weak results in 2019, and the management’s cost-cutting and dividend slashing led to a sharp fall in the demand for the stock given that Nokia had always been perceived as a strong yield play.
Management changes are also known to shake up investor confidence and bring down the stock price. Suri and Chairman Risto Siilasmaa’s departure from the company thus may have also contributed to the discount.
Nokia is no longer considered a blue-chip investment, but the stock looks more like a fallen angel to me after the recent crash. With a forward price-earnings ratio of 11.4 and an Enterprise-Value-to-Ebitda ratio of 6.9, the company is trading way below its Swedish peer Ericsson as well as other giants. The stock looks to have bottomed out, and while it remains a risky buy, it certainly deserves a place on my watchlist until the management shows concrete numbers pointing to a turnaround.
Disclosure: No positions.
Read more here:
- AT&T: Accumulate on Dips
- Nemaura Medical: The Potential proBEAT Launch Adds Some Steam
- 2U: An M&A-Oriented Education Technology Play
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
