For long-time readers following this author, picking Nokia (NOK) is not without disappointments. Value investing requires finding beaten-down, out-of-favor stocks that have upcoming positive catalysts to send them higher. With Nokia, markets are slowly recognizing the multi-year revenue potential for 5G.
Opportunistic firms bigger in size than Nokia may also find ways to unlock the company’s value. Ahead of complying with the U.S. National Security policy, governments are preparing the communications infrastructure. So, besides the possibility of getting bought out, there are several reasons why investors should still accumulate Nokia shares.
1) 5G Contracts
The Defense Department awarded several companies with $600 million worth of contracts. It is hiring companies to test their 5G communications technology at five of its military sites. Nokia is one of many companies involved in the “5G strategy.” This plan incorporates 5G technologies in warfighters.
Last week, on October 15, Fierce Wireless reported that Nokia will use Qualcomm’s (QCOM) 5G RAN platform. This will boost indoor small cells that cover home and small enterprise locations. Nokia’s 5G Smart Node will have a Qualcomm FSM100xx modem ready next year in Q1/2021.
Previously, Verizon (VZ) famously awarded Samsung (SSNLF) 5G contracts, which hurt Nokia stock. Verizon will deploy 5G mmWave sites with Samsung and Corning (GLW). Yet, Nokia offers a better price point and better 5G delivery. For example, operators can “simultaneously address 5G network densification and indoor coverage needs.”
When the Federal Communications Commission auctions its C-Band spectrum on December 8, telecom providers may bid for the 280 megahertz in the 3.7-3.98 GHz frequency (5G).
Collectively, the above-listed events are inclusive of compliance with the US National Security policy. The growing tensions between the U.S. and China (and the rest of the world to a lesser degree) will raise the importance of the policy in the years ahead.
2) Relative Undervaluation
At a recent close at $4.20, Nokia is worth $23.5 billion by market capitalization. Ericsson (ERIC) is worth $36.95 billion. And although it pays a dividend that yields 1.46%, Nokia posted a strong positive operating cash flow last quarter. It will do so again this quarter. This suggests that the company will re-instate its dividend at the earliest opportunity.
Below, you can see that Nokia has a higher score than Ericsson on value and profitability:
Source: SA Premium
I previously wrote that Ericsson is a better stock than Nokia (link for premium subscribers or DIY members). That opinion does not change. In this context, Nokia has better quant factor grades that suggest a suitor will recognize its undervaluation.
Below: Market cap comparison in the last decade
3) More 5G Contract Wins
Nokia lost 20% of its value since August 2020, when Samsung won a 5G supply deal with Verizon. Yet, the markets failed to notice that Nokia has continued to win big contracts since then. It will supply the communications solution for NASA’s space mission to the moon. The contract is worth $14.1 million. This is the first-ever cellular network on the moon. The win reaffirms Nokia’s excellence in LTE/4G reliability and high data rates. Plus, the solution is inexpensive and uses little power.
On September 29, Nokia signed a deal to supply BT with 5G RAN. In doing so, it becomes BT’s largest equipment provider. Nokia will supply equipment and services at BT’s radio sites. And while it will probably have low hardware margins due to the contract size, the 5G-based services and technical support services should lift its profits.
Nokia does not have a consistent record for beating analyst estimates. The company beat expectations half the time in the last six quarters. It missed earnings per share estimates two of those times:
Data courtesy of Stock Rover
Seasonality also works against Nokia shares for the next two months and the first half of 2021:
Nokia fell sharply in the summer instead of rising like it should have (by seasonal patterns). The contrarian may view the pattern as a bullish opportunity for buying the stock.
An American firm seeking to capitalize on 5G may buy Nokia for around $9.00. In a 5-year discounted Growth Exit model, use the following metrics:
Assume peak EBITDA predominantly from 5G in the fiscal year 2022:
In the near term, Nokia stock may continue its rebound from the $4.00 support line, ahead of the earnings report. If the company posts earnings that beat expectations under the new CEO, Pekka Lundmark, Nokia will finally rise and stay there.
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Disclosure: I am/we are long NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.