Νokia: Weak Sales Growth Could Be a Headwind

Nokia (NOK) provides network infrastructure, technology, and software services. It operates through the following segments: Ultra Broadband Networks, Global Services, IP Networks and Applications, and Nokia Technologies. The Ultra Broadband Networks segment comprises mobile networks and fixed networks.

The Global Services segment provides professional services with multi-vendor capabilities, covering network planning, optimization, and systems integration. The IP Networks and Applications segment comprises IP/Optical Networks and applications & analytics.

The Nokia Technologies segment focuses on advanced technology development and licensing. The company was founded in 1865 and is headquartered in Espoo, Finland.

I am bearish on NOK stock. The company is unprofitable and has made a turnaround in 2021, but financial health is not the greatest, and the valuation is neutral. Nokia became a meme stock in 2021 due to its low price and relatively high short interest, even though it has a market cap of $32.4 billion. Are Top Hedge Funds likely to have Nokia in their portfolios?

Nokia Business News

The latest Nokia business news includes the announcement that the company will deploy a high-performance optical backbone for WINDTRE in Italy. Nokia joined RE100. RE100 is “a global initiative led by The Climate Group in partnership with CDP, which brings together the world’s most influential businesses committed to 100% renewable electricity.”

Nokia reports its emissions to the global environmental disclosure system, CDP, and recently earned an A- score. NOK works with the CDP to track its supply chain emissions and climate targets.

Nokia stated that it expects an operating margin between 11% to 13.5% for 2022.

Q3 2021 Earnings: EPS In-Line, Revenue Beat

In Q3 2021, Nokia’s normalized EPS of $0.09 was a beat by $0.01, while EPS GAAP was in-line. Revenue of $6.31 billion was a beat by $13.08 million. NOK stock earnings lack a clear trend in the first nine months of 2021.

Year-over-year net sales increased 2%, operating profit increased 43%, and diluted EPS increased 100%. Nokia reported a free cash flow generation of €0.7 billion.

Fundamentals

In 2020, Nokia turned unprofitable with a net loss of $2.52 billion. In the first nine months of 2021, it has made a turnaround, delivering net profits. For the Fiscal Year 2021, we should expect a return to profitability. However, is this enough, and is it the main reason to be bullish for NOK stock now? I argue that there are several other headwinds to consider.

Nokia’s gross margin has been in long-term decline since peaking at 44.6% in 2015 (they are now 40.8%). Also, revenue has been flat over the past three years.

NOK’s Altman Z-score of 5.7 is in the safe zone. Its debt/equity ratio of 0.33 is healthy, and liquidity is good as both current and quick ratios are above 1.0 figures.

Nokia has been issuing new debt. Over the past three years, it issued €507 million of debt. Its price is close to a two-year high, and its price/sales ratio of 1.2 is close to a three-year high of 1.44.

I see very weak growth related to revenue and operating income. The 10-year average growth of revenue is -6.42%, and for operating income, it is -6.28%.

Efficiency ratios also show weakness. Inventory turnover and asset turnover are still well below the high values reported in 2016. On a TTM basis, there has not been any recovery for these two ratios.

Profitability is another main concern. While net margin, return on assets, and return on invested capital on a TTM basis are negative, there should be improvements when the full-year 2021 results are reported. I consider this improvement is important but fragile.

Valuation

Compared to the information technology sector, the valuation is mixed. Nokia has a forward GAAP P/E of 17.8 and a forward price/sales ratio of 1.2. The median values for the sector are 27.3 for P/E and 3.8 for price/sales, respectively.

While these seem to support a discount for Nokia, the three-year average of revenue is -1.9% implying the discount could be justified if weak sales growth continues.

Wall Street Take

Turning to Wall Street, Nokia has a Strong Buy consensus based on three Buys and one Hold rating assigned in the past three months. The average Nokia price target of $7.40 represents 35% upside potential.

Conclusion

Nokia has made an important turnaround in 2021, and it should return to profitability. The sales growth, though, is anemic, and investors should be patient to monitor if the rebound has legs or is fragile.

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