Nokia Stock Has Meaningful Upside Potential

Nokia Corp. (NOK) is a Finnish company that is involved in network and IP infrastructure, software, and other services.

I am bullish on Nokia because its strong growth momentum, significant competitive advantages, and implied upside potential make it worth considering.

Nokia Stock Strengths

Nokia offers software solutions focused on network operations and management, customer experience management, communication and collaboration, policy and charging, cloud services and IoT, digital security, and analytics designed to optimize the customer experience.

The company has a cult following — fiercely loyal customers who have been using Nokia products for years because of the durability, reliability, and creativity that Nokia phones provide.

NOK Recent Results

In the third quarter of 2021, Nokia saw 2% growth in constant-currency net sales. This was despite the global supply chain constraints and obstacles in North America for Mobile Networks. The impact of the headwinds was partially offset by strong growth in Nokia’s Network Infrastructure segment and double-digit growth in the Cloud and Network Services segment.

As such, net sales for the third quarter of 2021 stood at €5.4 billion (~$6.11 billion) compared to the previous year’s quarter, which generated net sales of €5.3 billion (~$6 billion). Diluted earnings were €0.06 compared to €0.03 for the third quarter of 2020, resulting in 100% growth.

Nokia also reported that it has 380 private wireless customers, with the business on track to see strong growth. This is attributed to increased investment in technology and strong market demand.

The key highlight of the third quarter was the introduction of the next-gen FP5 IP routing silicon, which offers thrice as much capacity while consuming 25% less power per bit than the older generation.

This technology enables the reduction of carbon footprints for both Nokia and its customers and allows the company to reduce its operating expenses.

For its outlook, Nokia has stated that the uncertainty around the global chip market reduces their visibility into the fourth quarter and Fiscal Year 2022. For Fiscal Year 2021, Nokia expects its Mobile Network, Network Infrastructure, and Cloud and Network Services segments to see growth of 5.5%, 9.5%, and 4.5% (at the midpoint), respectively. Furthermore, its Nokia Technologies segment is expected to grow more than 75%.

NOK Valuation Metrics

Nokia stock looks reasonably priced at current levels. Its forward enterprise-value-to-EBITDA multiple is currently 8.1 times, which is above its five-year average of 7.7 times. Furthermore, its forward price-to-normalized-earnings ratio is 16.8 times, which is below its five-year average of 17.6 times.

That said, growth is expected to be strong in 2021, with normalized earnings estimated to increase by 32.2%. However, analysts believe growth will slow down to 3.3% in 2022.

Wall Street’s Take

Turning to Wall Street, Nokia has a Moderate Buy consensus rating, based on two Buys and one Hold assigned in the past three months. The average Nokia price target of $7.14 implies 19.4% upside potential.

Summary and Conclusion

Nokia benefits from a well-diversified business model and an entrenched position in a high-growth, high-innovation space. Additionally, Wall Street analysts are generally bullish on the stock and assign it a price target that implies meaningful upside over the next year. Furthermore, the stock looks fairly valued compared to its average historical multiple.

On the other hand, the stock is not extraordinarily cheap, and the company does face competition from prominent global players. As a result, while I am bullish on the shares, investors should keep the risks in mind.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.