Is Nokia a Buy Under $6?

Finland-based network solution provider Nokia Corporation (NOK) specializes in network and Internet protocol (IP) infrastructure, software, and associated services. The company's shares have gained 45.3% in price over the past year and 42.7% year-to-date to close Friday’s trading session at $5.58. Its strong top-line growth, driven by improvement across all its business segments in its last reported quarter, and major product launches have driven its shares this year.

We think NOK is well-positioned to continue gaining in the near term, relying on its solid fundamentals. Furthermore, its expanding landscape for 5G networks is expected to boost its performance in the coming months.

Here’s what could shape NOK’s performance in the near term:

Favorable 5G Network Landscape

The 5G network industry is poised to benefit significantly in the coming months on a $1 trillion bipartisan infrastructure plan recently approved by the U.S. Senate and now awaiting passage in the House. The Biden administration wants  to provide affordable high-speed internet access in areas with no broadband infrastructure. This should drive the demand for 5G service providers like NOK. Furthermore, growing demand for machine-to-machine and Internet of Things networks, mobile broadband services, and data breach concerns are expected to drive the expansion of 5G infrastructure. This should bode well for NOK.

Positive Developments

This month, NOK unveiled FP5, its fifth generation, high-performance IP routing silicon. FP5 will help service providers meet today's stringent demands for effectively scaling network capacity, enabling new, higher-speed IP services, and providing unparalleled protection against growing network security threats. Through this launch, the company is lifting the bar by adding support for high-density 800GE routing interfaces, a 75% decrease in power consumption, and new embedded line rate, flow-based encryption capabilities to four generations of industry-leading network processors.

Also, this month, NOK and Indosat Ooredoo announced the commercial debut of 5G services in Surabaya, Indonesia. Under the terms of the agreement, customers of Indosat Ooredoo will benefit from new enterprise and industrial use cases enabled by the new NOK 5G experience center.

Robust Financials and Profitability

During the second quarter, ended June 30, 2021, NOK's net sales increased 4.3% year-over-year to €5.31 billion ($6.30 billion). Its operating profit rose 184.7% from year-ago value to €484 million ($573.82 million). Its net income increased 254.6% year-over-year to €351 million ($416.14 million), while its EPS grew 200% from the prior-year quarter to €0.06 ($0.07).

NOK’s 10.7% trailing-12-months EBIT margin is 23.1% higher than the 8.7% industry average. Also, the company’s 6.9% trailing-12-months ROC is 40.9% higher than the 4.9% industry average. Furthermore, its $3.20 billion cash from operations compares with the negative $116.77 million industry average.

Favorable Analyst Estimates

Analysts expect NOK’s revenues to rise 5.6% in its fiscal year 2021 and 2.9% next year. The consensus EPS estimates indicate a 27.6% year-over-year improvement in the current year and a 2.7% rise next year. In addition, NOK’s EPS is expected to rise at a 17.8% CAGR  over the next five years.

The company has an impressive earnings surprise history; it topped the Street’s EPS estimates in three of the trailing four quarters.

Moreover, analysts expect the stock to hit $7.33 in the near term, which indicates a potential 31.4% upside.

Discounted Valuation

In terms of forward P/E, NOK is currently trading at 1.88x, which is 60.3% lower than the 4.72x industry average. In addition, its 20.24 non-GAAP forward PEG ratio  is 31.2% lower than the 29.42 industry average .Moreover, NOK’s forward EV/EBIT and Price/Book multiples of 9.76x and 1.71x, respectively, are significantly lower than the 20.11x and 6.42x  industry averages.

POWR Ratings Reflect Solid Prospects

NOK has an overall B grade, equating to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NOK has an A grade for Sentiment, and a B for Value. Analysts’ expectation about its EPS and revenue growth justifies the Sentiment grade. And the stock’s lower-than-industry valuation multiples are consistent with the Value grade.

Of the 55 stocks in the Technology - Communication/Networking industry, NOK is ranked #17.

Beyond what is stated above, we have graded NOK for Stability, Growth, Quality, and Momentum. Get all NOK ratings here.

Bottom Line

With the growing demand for 5G networks worldwide, NOK should witness stable growth in the coming quarters. Moreover, its continued efforts to improve and evolve its network infrastructures and solutions should propel the company's performance and raise investors’ hope surrounding the stock. Thus, we think the stock could be a wise bet now.

How Does Nokia Corporation Stack Up Against its Peers?

NOK has an overall B grade in our proprietary rating system. This rating is superior to its peers in the Technology – Communication/Networking industry, such as Franklin Wireless Corp. (FKWL), Arista Networks Inc. (ANET), Harmonic Inc. (HLIT), which have a C (Neutral) rating.

NOK shares were trading at $5.62 per share on Monday morning, up $0.04 (+0.72%). Year-to-date, NOK has gained 43.73%, versus a 19.64% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

More...