Company Reports

Nokia experienced another huge sales decline in its first quarter, which is unsurprising considering the generally depressed global market for communications equipment over the past year and robust spending on mobile equipment in India during the first half of last year. In a report that closely mirrored Ericsson’s earlier this week, Nokia did exhibit and articulate some positives, notably margin expansion, progress on a cost-efficiency program, and an expectation that sales are poised to turn up. We are maintaining our EUR 5.50 fair value estimate for the no-moat company.

Nokia’s biggest business supplies radio access network equipment and services to telecom carriers to build public wireless networks. Nokia has lost some market share to Ericsson in recent years, but it should still experience tailwinds over the next few years from the global 5G upgrade cycle. It also benefits from the explicit or implicit exclusion of Huawei and ZTE equipment in many Western markets, as governments consider banning the Chinese vendors. In addition, carriers typically source from multiple vendors, so Ericsson's strength does not necessarily come at Nokia's expense.

It did not take much for Nokia’s stock to pop, considering how bleak performance had been throughout 2023. Management was less dour than it had previously been and expects a sales pickup in the second half of 2024. With a large net cash position and a cheap stock, the firm also initiated a EUR 600 million buyback that it intends to complete within two years. We don’t expect stellar performance from Nokia, but we don’t believe 2023 was reflective of the firm’s normalized potential. With rival Ericsson sitting in the same boat and global fixed and mobile network investment still required as data usage grows rapidly, we expect significant improvement over the next few years despite our view that Nokia has no moat. We are maintaining our EUR 5.50 fair value estimate and think the stock remains undervalued.

Nokia’s biggest business supplies radio access network equipment and services to telecom carriers to build public wireless networks. Nokia has lost some market share to Ericsson in recent years, but it should still experience tailwinds over the next few years from the global 5G upgrade cycle. It also benefits from the explicit or implicit exclusion of Huawei and ZTE equipment in many Western markets, as governments consider banning the Chinese vendors. In addition, carriers typically source from multiple vendors, so Ericsson's strength does not necessarily come at Nokia's expense.

Nokia’s biggest business supplies radio access network equipment and services to telecom carriers to build public wireless networks. Nokia has lost some market share to Ericsson in recent years, but it should still experience tailwinds over the next few years from the global 5G upgrade cycle. It also benefits from the explicit or implicit exclusion of Huawei and ZTE equipment in many Western markets, as governments consider banning the Chinese vendors. In addition, carriers typically source from multiple vendors, so Ericsson's strength does not necessarily come at Nokia's expense.

Nokia and Ericsson stocks had sizable moves in opposite directions on Dec. 5 on the news that AT&T intends to deploy Ericsson’s open radio access network, or O-RAN, equipment throughout most of its - network by 2026. At the margins, the news is positive for Ericsson and negative for Nokia, but we think the market has overreacted to how consequential the contract is, and we don’t think this portends further deterioration at Nokia while Ericsson gains share. We are maintaining our EUR 5.50 fair value estimate for Nokia and SEK 95 fair value estimate for Ericsson.

Though they’re tough to find and instill little confidence, here are the positives we see following Nokia’s third-quarter results: the company did not further reduce its 2023 guidance after doing so last quarter, implying a big sales bounceback in the fourth quarter; management expects free cash flow to go positive in the fourth quarter after it has been depressed by working capital fluctuations the past three quarters; and the terrible operating results are not company-specific. Peer Ericsson’s business has also been under pressure, and other companies that rely on U.S. wireless carrier spending have seen slowdowns. Industrywide, we expect sales growth to return in 2024.

Nokia’s biggest business supplies radio access network equipment and services to telecom carriers to build public wireless networks. The business is historically cyclical, but the world is currently in the early stages of the 5G upgrade cycle. Nokia has lost some market share to Ericsson in recent years, but it is still seeing its business rise due to 5G. It also benefits from the explicit or implicit exclusion of Huawei and ZTE equipment in many Western markets, as governments consider banning the Chinese vendors. In addition, carriers typically source from multiple vendors, so Ericsson’s rise is not a zero-sum game in any event.

Nokia experienced the same headwinds as Ericsson in the second quarter, with the primary culprit being a big slowdown in North American carrier spending and the mix-shift away from the more profitable North American region, resulting in a reduction in margins. The weak results were well-telegraphed—management previously said customers were pulling back on spending, U.S. mobile carriers foreshadowed less network investment in 2023, and Nokia cut its full-year guidance last week. We are not changing our long-term forecast and don’t expect much annual revenue growth in the long term. We are maintaining our EUR 6 fair value estimate.

Nokia’s biggest business supplies radio access network equipment and services to telecom carriers to build public wireless networks. The business is historically cyclical, but the world is currently in the early stages of the 5G upgrade cycle. Nokia has lost some market share to Ericsson in recent years, but it is still seeing its business rise due to 5G. It also benefits from the explicit or implicit exclusion of Huawei and ZTE equipment in many Western markets, as governments consider banning the Chinese vendors. In addition, carriers typically source from multiple vendors, so Ericsson’s rise is not a zero-sum game in any event.

As expected, Ericsson’s second-quarter results were weak, with reduced wireless network spending in the U.S. causing a big dip in organic sales and pressuring margins, relative to last year. While the second-quarter performance was in-line to slightly better than what management had publicly anticipated, management wavered on the timing of a reacceleration, which it previously expected in the second half of 2023. None of this has any bearing on our long-term forecast. We expect mobile network spending to be cyclical, but for there to be very little average annual growth over the long term. We are maintaining our SEK 95 fair value estimate and believe the stock is undervalued.

Although it endured similar headwinds, Nokia’s first-quarter results were much better than rival Ericsson’s, all things considered. Nonetheless, Nokia’s stock sold off just as much in response to the first-quarter report. More than margin weakness or the fact that first-quarter sales benefitted from tailwinds that will not persist throughout the year, we attribute the selloff to management stating it sees signs of the economic environment impacting customer spending. Any near-term fluctuations in revenue growth will have little impact on our long-term view. Regardless of timing, we expect Nokia to benefit from 5G and future wireless upgrade cycles but believe its business will remain cyclical. We don’t project much long-term sales growth, on average, but we still think the stock is materially undervalued relative to our EUR 6 fair value estimate.

Nokia’s biggest business supplies radio access network equipment and services to telecom carriers to build public wireless networks. The business is historically cyclical, but the world is currently in the early stages of the 5G upgrade cycle. Nokia has lost some market share to Ericsson in recent years, but it is still seeing its business rise due to 5G. It also benefits from the explicit or implicit exclusion of Huawei and ZTE equipment in many Western markets, as governments consider banning the Chinese vendors. In addition, carriers typically source from multiple vendors, so Ericsson’s rise is not a zero-sum game in any event.

Nokia’s biggest business supplies radio access network equipment and services to telecom carriers to build public wireless networks. The business is historically cyclical, but the world is currently in the early stages of the 5G upgrade cycle. Nokia has lost some market share to Ericsson in recent years, but it is still seeing its business rise due to 5G. It also benefits from the explicit or implicit exclusion of Huawei and ZTE equipment in many Western markets, as governments consider banning the Chinese vendors. In addition, carriers typically source from multiple vendors, so Ericsson’s rise is not a zero-sum game in any event.

In concluding a solid 2022, Nokia’s excellent fourth quarter showed strength across all segments with sales and margins. While a moderation of currency tailwinds should make reported 2023 sales less eyepopping, underlying organic growth acceleration should continue. We are raising our fair value estimate to EUR 6.00 from EUR 5.60 and believe the stock is undervalued.

Nokia’s biggest business supplies radio access network equipment and services to telecom carriers to build public wireless networks. The business is historically cyclical, but the world is currently in the early stages of the 5G upgrade cycle. Nokia has lost some market share to Ericsson in recent years, but it is still seeing its business rise due to 5G. It also benefits from the explicit or implicit exclusion of Huawei and ZTE equipment in many Western markets, as governments consider banning the Chinese vendors. In addition, carriers typically source from multiple vendors, so Ericsson’s rise is not a zero-sum game in any event.

While Nokia’s third quarter disappointed the market, its sales and margins were good across almost all segments. Unfortunately, the company seems no closer to resolving licensing disputes that have modestly weighed on revenue all year. And because Nokia Technologies, the firm’s intellectual property segment, has such high reported margins, the loss of that revenue has an outsize impact on total operating margins.

Nokia is a key provider of telecommunication hardware, software, and services to communication service providers. CSP equipment spending provides robust growth during generational wireless upgrade cycles followed by spending lulls, with 5G being the latest tailwind.. 5G's promise of connecting billions of wireless devices at incredible speed across more spectrum bands, along with more use cases than 4G, may offer Nokia more upside than previous wireless generations. However, we do not view Nokia's core market as moat supportive because CSPs typically multisource equipment and possess purchasing power over their vendors.

We are raising our fair value estimate of no-moat Nokia to $5.90 from $5.70 (raising to EUR 5.70 from EUR 5.40 to incorporate foreign exchange rates) after its first-quarter results exceeded our expectations for both revenue and adjusted earnings. Shares gained around 8% after the release, and we view shares as undervalued. Although Nokia continues to be hampered by supply chain challenges, profitability was bolstered by margin accretive updated chip shipments and momentum in 5G buildouts and fiber deployments. Management noted that they see signs of supply chain challenges easing through the second half of this fiscal year and the first half of fiscal year 2023. We view the continued product demand in spite of these short-term headwinds as a testament to the global trend of 5G buildouts and a strong opportunity for Nokia when the supply limitations subside.

Nokia is a key provider of telecommunication hardware, software, and services to communication service providers. CSP equipment spending provides robust growth during generational wireless upgrade cycles followed by spending lulls, with 5G being the latest tailwind.. 5G's promise of connecting billions of wireless devices at incredible speed across more spectrum bands, along with more use cases than 4G, may offer Nokia more upside than previous wireless generations. However, we do not view Nokia's core market as moat supportive because CSPs typically multisource equipment and possess purchasing power over their vendors.