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Three Reasons to Like Nokia Stock Despite Risks
Stock Analysis & Ideas

Three Reasons to Like Nokia Stock Despite Risks

I am bullish on Nokia (NOK) as its strong competitive positioning, cheap valuation, and solid growth potential more than offset the current inflationary, supply chain, and geopolitical risks facing the company.

Based in Finland but operating on a global scale, NOK is a telecommunications company that plays a leading role in providing equipment to the industry. It sells both fixed-line and wireless services, software, and hardware. It also operates its Technologies business segment that generates royalties from Nokia-branded cellphones.

In this article, I will lay out three reasons to like NOK stock that make me bullish here.

Strong Recent Performance

NOK posted solid 5% year-over-year top-line growth in its first fiscal quarter of 2022, driven largely by Network Infrastructure growth of 14% and Cloud and Network Services sales increasing by 9%. Meanwhile, its Technologies business segment fell 16%, while its Mobile Networks business saw flat year-over-year performance.

However, the Mobile Networks business saw some encouraging developments as its gross and operating profit margins increased while revenue did not grow primarily due to short-term supply chain headwinds. As supply chain conditions normalize, we expect this segment to return to growth.

5G rollouts across the global economy should also serve as a tailwind for the company as it will drive increased demand for NOK’s products and services.

Competitive Positioning in the Telecommunications Industry

While the telecommunications industry, in general, is quite commoditized, NOK enjoys significant scale both in terms of volume, product and service breadth, as well as geographic reach. With businesses that span telecommunications networks, software, and technology, NOK touches a broad span of the industry, which gives it numerous cross-selling opportunities and greater customer loyalty.

Strong Case for Undervaluation

Another reason to be bullish on NOK stock is that its stock price looks remarkably cheap after pulling back sharply recently. It currently trades for a remarkably cheap 5.49 forward enterprise-value-to-EBITDA ratio compared to its five-year average multiple of 7.6.

Meanwhile, its forward price-to-normalized-earnings ratio is only 11.5, whereas its five-year average is 16.5. Last but not least, its forward price-to-free-cash-flow ratio is 15.9 compared to its five-year average of 26.6.

This discount looks even more attractive when considering that EBITDA is expected to increase by 7.7% in 2022, 8.4% in 2023, and 5.3% in 2024, according to analysts. Normalized earnings per share are expected to increase by 7.6% in 2022, 11.4% in 2023, and 7.5% in 2024, painting an even more exciting future for the stock than the already bullish EBITDA forecasts do.

Wall Street’s Take

According to Wall Street analysts, NOK earns a Moderate Buy consensus rating based on three Buys, two Holds, and zero Sell ratings assigned in the past three months. Additionally, the average Nokia price target of $6.62 puts the upside potential at 29%.

Summary and Conclusions

NOK enjoys strong competitive positioning in three key areas of the telecommunications sector: Networks, Software, and Technology. It sells hardware, software, and services, and it is a company that benefits from a substantial business relationship network, a global presence, and economies of scale. This enables it to generate strong profitability and steady growth.

The business is poised to see additional tailwinds in the coming quarters and years as the 5G rollout across the globe continues alongside expectations for easing supply chain headwinds.

In addition, NOK shares currently look quite compellingly priced. They trade at clear discounts to recent history across multiple valuation metrics even as analysts expect the next several years to see continued robust EBITDA and EPS growth. The dividend is also poised to grow at a solid clip, and analysts put the price target at a level that implies substantial upside potential over the next year.

That said, if inflationary and supply chain headwinds persist, NOK could face challenges meeting analyst expectations for continued profitability growth. Furthermore, the commoditized nature of its products and services could mean that competition will be able to gain a foothold and chip away at its market share or even eat into its profit margins.

Lastly, investors might want to keep in mind that NOK is headquartered in Finland, which is not yet a member of NATO and borders Russia. Recently, tensions between the two countries have increased due to the Russia-Ukraine conflict and threats made by the Russian military that it might take hostile measures toward Finland if it tries to join NATO.

Overall, I am bullish on NOK as I believe the valuation looks compelling here compared to the risks it faces.

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