Nokia: My Take On A Potential Upside For The Company

seekingalpha11-21

Nokia has a strong asset and patent portfolio, but its competitive edge is limited, especially against rivals like Ericsson.Despite recent improvements, Nokia's sales have been declining, and its ...

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This is related to the company's impressive portfolio of qualitative assets and patents, as well as the technology upside for the company's 5G portfolio. However, I've never really directly invested in Nokia, beyond watchlist positions, as I have always viewed the risk overhang and the company's history since it stopped being a \"good cellphone company\", as too large. Or rather, that the company's upside is easily beaten by other companies in the telco sector. This is far from unique when it comes to my view for Nokia. I have a very similar view on Ericsson (ERIC). My choice of investing in Ericsson, for instance, has been indirect ownership through the Swedish power investment business Investor AB, the Wallenberg sphere business. The reasoning here was risk mitigation, and it has worked well. Here, for Nokia, no such investment alternative is immediately obvious, and as such, I've been careful about doing anything there. In this article, I will update my previous \"Hold\" rating thesis from my article a few months back. The company has outperformed from this rating, and despite the recent decline due to some analyst commentary, which you can find here, I would view the company as relatively highly valued. Let's look at if there's a reason for me to \"up\" my price target and change my views on Nokia. Nokia - Quality, but always been tricky since I started covering it Multinational telco company and IT company Nokia with over 150 years behind it remains an interesting business to look at. The question as always becomes the company's valuation-related upside - and what we can expect. Plenty of analysts believe Nokia to be undervalued. In fact, many, including Morningstar, have the company at a significantly higher price target than I do. My PT has been between a €2.5-€3.5 PT for a good, solid upside. Many analysts are at €4.5-€5/share. (Source: Morningstar) And despite some upside in recent months, I do want to point out that the company has been in decline on an almost secular basis since 2019 when the company traded at above €7/share. If you invested there, you've still probably not recouped your original investment. Like a lot of companies, Nokia troughed in 2019-2020 during COVID-19, and funnily enough, that's actually when many analysts were negative on it - and that's when I turned positive. Now... I'm so-so. Because of the company's variety of businesses, all focused on working with the construction of communications networks, the company has peers/competitors on every single front. There is very little in Nokia, aside from some of its patents, that offers a genuine competitive advantage for Nokia. This can be confirmed with the recent move by some telcos like AT&T (T) to favor Ericsson over Nokia instead - and also the expectation that Deutsche Telekom may do the same.   Nokia Oyj 3Q24 Presentation IR (Nokia Oyj 3Q24 Presentation IR) The company works primarily in the relatively attractive field of mobile networks where the company provides equipment, software, and services for WRA networks. The company's customers are telcos like DTEGY and T - but Nokia has not done a good job here. This is evidenced by its loss of market share during the 5G rollout, and this was in turn because Ericsson offered a better and more competitive product at the time. Generally speaking, telcos tend to use several of the vendors, but the lucrative contracts usually go to \"one\".   Nokia Oyj 3Q24 Presentation IR (Nokia Oyj 3Q24 Presentation IR) We saw 3Q24 a few weeks ago. The results for Nokia here were rather encouraging because the company is seeing a road back to top-line growth. It's crucial to not be too exuberant here though, because despite improvement, the decline in numbers was still significant. The upside came in the form of (finally) margin improvements and new deals, which are set to bring in new customers and customer volumes.   Nokia Oyj 3Q24 Presentation IR (Nokia Oyj 3Q24 Presentation IR) This led to many analysts expecting significant improvements in sales - but I believe these analysts are taking out a victory too early. The bullish arguments for Nokia are based on the 5G network rollout and buildout. Unfortunately, this is an area where Nokia has lost quite a bit already. While the tech cycle with more spending and private networks is indisputable, the question is regarding Nokia's role in this business. The company's move into cloud services and SaaS-based services is not something I even view as special, because that is a given now. The one advantage Nokia truly holds is its IP portfolio - and the advantage here is that products even other than handsets will now also need technology, which increases licensing income. But will this income be enough to offset the negatives in the business or the risks?   Nokia OYJ 3Q24 Presentation IR (Nokia OYJ 3Q24 Presentation IR) To that, I say \"no\". The risks remain. With risks, I am referring to things like the company's concentrated customer base, which means that the company's customers are the ones with the \"power\" in the relationship, as evidenced by the moves between Nokia and Ericsson. The move to technology and bases like Open RAN will further erode whatever advantages remain here, and while the exclusion and aversion to Huawei on the European and many of the international markets are a definite advantage for the company, the short life of the company's technology does mean that Nokia's business, like pharma and other companies, is incredibly R&D-heavy. This, dear readers, is why I favor telcos instead of telco enablers. It's the safer way to invest in the sector. It's why I prefer telco/communications to content creation. One enables the viewing of content with legacy and attractive technologies that users need to pay for a variety of reasons - the other creates content that after the release is on the balance sheet at a dubious/uncertain valuation, and usually those companies also lack dividends. It's an attractive sector - but we want to know which way we want to invest in that sector. For a long time, my choice has not been to directly invest in these businesses. Just compare my returns on Deutsche Telekom with returns on Nokia during the same timeframe, and you'll see what you can get there. Nokia has good fundamentals and a yield of 3%. That is good. But as you can see in the quarterly results above, many of the trends are still pointing towards a sales decline. A margin improvement does not, in my view, change this very basic estimate. The company claims solid profit and working capital - and this is true - profit is up. But between CapEx, taxes, restructuring, investments, and other things, the level was almost identical to 2Q24. The company's sales patterns during 3Q24 continue to showcase, both for this and for the last year, problematic patterns.   Nokia Oyj 3Q24 Presentation IR (Nokia Oyj 3Q24 Presentation IR) Let's look at the company's valuation, and why I do not believe that this company has a massive upside, as some believe that it has. NOK Stock Valuation - Sub-par, unless you believe in significant earnings expansion Nokia tends to, in the shorter term, trade at around 11-13x P/E. I view the shorter-term trends as more accurate here because the company's 20-year averages include times when times were more macro-favorable to Nokia. The company's positive is a low debt - less than 14% long-term debt to cap, but with only a BBB- rating despite this. The company's yield is around 3%, which is okay, but not great. Moreover, forecasting for the company seems a Herculean task with only slight chances of success. This is one of the times when the company beating the estimates might not be a great thing - it just goes to show you how uncertain the company actually is.   F.A.S.T graphs Nokia earnings accuracy (F.A.S.T graphs Nokia earnings accuracy ) Because of this, I do not view the forecasts as likely, and I would need a significant earnings upside to even consider adjusting my targets here. And we do not have this. For the next 2-3 years, the company is expected to average a growth rate of 2%, with a 9% earnings decline in 2025, followed by around 12% growth in 2026E - but again, looking at accuracy puts into question how accurate this could be considered to be. Many analysts are maintaining a higher multiple than I am - between 14-15x P/E, and an 8-9x EBITDA multiple. My question here would be to ask \"why\"? The company does have an attractive patent portfolio, but many companies do. The company's earnings are not expected to grow at an outsized pace, nor is the company one with a significant, high yield at this time. I expect continued organic sales decline. The question of whether we're at the bottom of the cycle can be looked at in 1-2 years, but I believe anything above a 1-3% annual sales growth to be a fanciful fantasy. There is some strength from the upgrade cycle at this time, as well as ongoing positives in its infrastructure business, and the patent licensing arm will see some higher results as well. This is worth a slight target increase, which means I now consider Nokia a \"Buy\" below €3.2/share. But that is a far cry from the €4/share price that we have at this time - and even the patent arm's 100% gross margin level cannot make me change my mind here. Headwinds are too many, and I would agree with the analyst's assessment that some telcos may drop Nokia. Open RAN and wireless standards similar to it will impact Nokia's pricing power, and the company will in turn have to push more of an already strained income to its R&D in order to keep up. The industry, simply put, is getting more competitive, and I believe Nokia has a hard time in trying to keep up here. Unlike other analysts, I do not expect more than a 13-14% EBITDA margin at the highest, and I doubt we'll see 15% EBITDA or above as we had in 2021 and before. Based on this, I give Nokia the following current price target and thesis. Thesis  Nokia is a theoretically impressive company that unfortunately has not been performing all that well for the past few years. Since 2020, the company's share price has declined. This is not a good development, and a 3% yield does not help with this either. I consider Nokia to be a tricky company to invest in due to all the risks I have mentioned to the business. I would, in fact, consider it to be risky enough to discount it deeper than the market has seen fit to do here. Because of this, I would not allow Nokia to trade above an 11-12x P/E as a forward sort of valuation - accounting for some of the uncertainty and macro volatility. I also argue that the Open RAN risk has not been properly discounted historically because this is new territory. I give Nokia a share price target of €3.2/share and give it a \"HOLD\" at this time.  Here are my criteria and how the company fulfills them (italicized).  This company is overall qualitative. This company is fundamentally safe/conservative & well-run. This company pays a well-covered dividend. This company is currently cheap. This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.   The company fulfills 3 out of 3 quality indicators, and 0 out of 2 valuation indicators. That means 3/5 \"stars\" here, which typically isn't enough. Based on this, and a valuation target of €3.2/share where I see a risk/reward-adjusted upside that's attractive enough for me, I give the company a \"Hold\" rating as of November 2024.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485512736"}