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Nokia Stock Is a Winner, But How Much Higher Can It Go?
Stock Analysis & Ideas

Nokia Stock Is a Winner, But How Much Higher Can It Go?

It has been a good year for Nokia (NOK) investors, and it got better still last week. Shares were already up by a strong 55% on a year-to-date basis and trended higher after the company reported Q2 results. While the Finnish telecom giant had already made a positive pre-earnings announcement, when it said it expected 2021’s revenue to come in higher than previously anticipated, the market rewarded the company after it fleshed out the details.

In Q2, Nokia generated revenue of €5.31 billion ($6.3 billion), up 4% year-over-year and 9% higher when currency fluctuations are taken into account. Analysts were expecting sales of €5.16 billion.  

On an adjusted basis, gross margin increased to 42.3% from 39.6% in the same period last year, and similarly, operating margin was up from 8.3%. to 12.8%. Adjusted earnings per share rose from €0.06 a year ago to €0.09, beating the Street’s forecast of €0.04.

Nokia raised its full year 2021 guidance from the €20.6 billion to €21.8 billion range to between €21.7 billion to €22.7 billion and increased the operating margin target from the prior 7-10% range to between 10 and 12%.

As a result, Raymond James’ Simon Leopold increased his 2021 sales estimate from €22.1/$26.3 billion to €22.1/ $26.2 billion and raised the EPS estimate from €0.28/$0.34 to €0.37/$0.43.

The analyst particularly notes the gross margin upside, which came as a bit of a surprise. “A 1-time software deal contributed nearly a point of the upside, but even without this benefit, gross margin exceeded our estimate by 270 bp,” Leopold said. “The improvement comes as good news and left us suspecting management took a conservative tact forecasting.”

That said, Leopold thinks the stock’s current valuation is just about right and notes both bearish and bullish arguments.

“Nokia continues to suffer from its loss of Verizon in 5G, will see price pressure from new deals, and competition remains intense,” the analyst opined. “However, the developing Huawei backlash outside of China, a win in China’s 700 MHz 5G project, and a resurgence in Fixed Networks investment help with the turn-around. With an EV/Sales near 1x and a mid-teens PE, the stock appears fairly valued.”

Accordingly, Leopold reiterated a Market Perform (i.e. Hold) rating without suggesting a price target. (To watch Leopold’s track record, click here)

Leopold’s outlook, however, is not a popular one on Wall Street. Of the 13 Nokia reviews on record, 11 say Buy while 3 recommend to Hold, all culminating in a Strong Buy consensus rating. The average price target currently stands at $7.05, suggesting shares will rise by an additional 12% over the next 12 months. (See NOK stock analysis on TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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