Nokia: A Comeback Story

Thesis Summary Nokia Corporation (NYSE:NOK) is one of the main players in the 5G space and will surely benefit from its increased adoption. Not only will this be a tailwind for revenue growth, but I also expect Nokia to improve its profitability and start generating a lot more cash in the next two years. With plenty of revenue yet to come from 5G and China, I rate Nokia a strong buy and see the share price going to $8 in the next couple of years. Source: Arstechnica.com Company Overview Nokia has had an interesting and colorful past. Most of us remember first seeing the Nokia logo on phones. Nokia was one of the first companies to mass-produce and sell smartphones. Back in 2010, Nokia was responsible for ⅓ of smartphone sales worldwide. Of course, we all know how that story ends. By 2012, with smartphone sales at 1.6 billion units, Nokia had only 5% of the market, having lost ground to Apple, Inc.’s (NASDAQ:AAPL) iPhones and Samsung Electronics’ (OTC:SSNLF) Android-powered smartphones. Much has changed since then. Nokia doesn’t even manufacture phones anymore; sold this division to Microsoft, Inc. (NASDAQ:MSFT) in 2013. Nokia is now essentially a network-provider, offering infrastructure and related services and technology. Let’s have a look at how Nokia has been doing more recently: Source: 20-F (Annual Report) Above we can see the performance for the last three years. Overall, sales growth has been slow, barely increasing 1% since 2017. On top of that, the gross margin has been falling, although the company reported an operating profit in 2019, thanks to a smaller tax burden and unusual items. The company has also been depleting its cash reserve as it invests in the transition of its network to 5G. Despite this though, the balance sheet is still strong with a D/E of 0.3 and enough assets to cover liabilities. The company hasn’t been expanding its debt load too much, and financial leverage has been falling since 2017. The good news is net sales did increase substantially, and some segments such as IP Routing had double-digit growth. The real problem Nokia is facing is not growth, but profitability. The annual report explicitly says that the company’s objective for 2020 will be to generate more cash, but the question remains – can Nokia stage a comeback? Riding the 5G wave Nokia is now one of the big players involved in the 5G market. Together with Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) and Huawei, each of these companies represents about ¼ of the total 5G RAN market by some estimates. As I already covered extensively in my Defiance Next Gen Connectivity ETF (NYSEARCA:FIVG) article, 5G technology will power inventions of the future such as IoT, AI, and driverless cars. But more significant, at least in the near-term, will be the growth in mobile broadband users. Source: Statista Not only are users growing, but the rate of growth is also improving, and we can expect this to be accelerated thanks to the enhanced functionalities of
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