- Licensing constitutes 47% of the Trefis price estimate for Nokia's stock.
- Networks constitute 46% of the Trefis price estimate for Nokia's stock.
WHAT HAS CHANGED?
- Impact of coronavirus outbreak
Nokia stock has declined over the last few weeks, driven by the coronavirus pandemic. While it's likely that the company's revenues could hold up, as wireless carriers are likely to go ahead with their planned capital expenditures for this year, given the surge in demand for Internet connectivity, the company could be impacted if the economy takes more to recover from the health crisis.
- Latest Earnings Q3 2020 Results
Nokia delivered a rather soft performance for its fiscal third quarter. Nokia's total revenue fell by 7% to €5.3 billion while Nokia's adjusted profits rose by 14% to while €305 million led by lower operating expenses and improved gross margins across Networks and Nokia Technologies business. Covid-19 had a minor impact on the company's business as sales worth €200 million got delayed to future periods. Moreover, the company downgraded its outlook for full-year 2020, expecting adjusted EPS to be in the range of €0.18 to €0.28, as compared to the previous range of €0.2 to €0.30 while expecting its operating margin to be in the range of 7-10%, down from the previous expectation of 8-11%.
- Nokia To Pause Dividend Payments
The third and fourth intended dividend installments for FY 2018 was stopped in order to improve the company's bottom line and are not expected to resume until Nokia is able to report a net cash position of approximately €2.1 billion. Nokia also wants to pause payments to increase investments in 5G and strategic focus areas. The company is attempting to fend off competitors in the 5G space through cost-cutting, the development of 5G products, and initiatives such as the opening of a lab dedicated to 5G development.
- Nokia's Recent 5G Wins
Operators across the world have been outlining plans for their 5G upgrades, with U.S. carriers commencing commercial 5G deployments.
Scoring early wins is crucial for equipment providers, as the technology is expected to have a relatively long life cycle, and Nokia has been executing fairly well on this front. As of April 2020, the company had signed 70 commercial 5G deals across the world. The company could also stand to gain from the current headwinds faced by Chinese telecom equipment behemoth Huawei. The U.S. has been persuading its allies to stop using Huawei equipment, amid concerns that it promotes spying by the Chinese government.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Nokia's value that present opportunities for upside or downside to the current Trefis price estimate for Nokia:
- Networks EBITDA Margin:
Networks' Wireless EBITDA margins declined from about 16% in 2015 to about 11% in 2019, driven by higher competition from Chinese players such as Huawei and ZTE, which forced Nokia to reduce its prices. Moreover, declining 4G installations also hurt sales, impacting margins. However, we expect the metric to rise to about 13% by the end of our review period, driven by higher sales of 5G equipment and solutions. If the metric rises to about 16% in the same period, it could bolster our price estimate by about 15%. On the other hand, if margins remain flat at current levels, our price estimate could decline by 12%.
- Licensing Revenues: Nokia's licensing revenues have grown rapidly from EUR 100 million in 2010, to EUR 1 billion in 2015, with the biggest jump coming in 2015. The number grew to about EUR 1.7 billion in 2017, driven partly by new licensing agreements and the settlement with Apple although it fell slightly to hover around EUR 1.5 billion over 2018-2019. We expect revenues to grow in the long run, driven by Nokia’s sizeable patent portfolio and its licensing re-entry into the smartphone segment. However, there could be significant upside to our price estimate if Nokia manages to more efficiently leverage its robust patent portfolio. If Nokia manages to increase its licensing revenue to $2 billion in the long run, there could be an upside of more than 18% to our price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Nokia at the top of the page.
Finland-based Nokia was once the largest mobile phone manufacturer globally. However, the handset business was officially transferred to Microsoft in 2014, which at that point made Networks its most valuable segment. However, now with the licensing re-entry into the smartphone business, Licensing is the most important segment for the company. In 2015, Nokia announced its merger with Alcatel-Lucent worth $16.6 billion, and with the recent completion of the merger, Nokia has become one of the biggest players in the telecom gear industry. Nokia sold-off its third segment, HERE maps unit, to German car makers for $3 billion in 2015.
SOURCES OF VALUE
Significant market share gain
At the end of 2015, Nokia's share in the wireless network infrastructure market stood at 14.4% following a trend of notable declines. However, in 2020, the value is expected to be around 27%. Post-2019, we expect the share to stabilize at approximately the same level, thanks to Nokia's strong presence in North America and contract wins in the U.S.
Sizeable profits from licensing business
The licensing division of Nokia contributes just 7% to the company's revenues but still is the most valuable segment as per our estimates. This can be attributed to the fact that this business is extremely profitable, given its nature, having EBITDA margins in the range of 85% as opposed to the networks business, where EBITDA margins are around 11%. Also, with the recent licensing deal for smartphones that would allow Nokia to license a huge portion of its patent portfolio, the licensing business appears to have better growth potential.
Nokia's Increasing Focus On the U.S. Market
Nokia Networks has increased its focus on more lucrative contracts in regions such as the U.S., where Chinese manufacturers such as Huawei and ZTE have been blacklisted amid security concerns. North America has historically accounted for less than 10% of Nokia's revenues, but the mix is gradually improving with several network expansion/upgrade contract wins. As of 2019, North America accounted for about 30% of Nokia's total revenue, driven partly by the Alcatel deal.
Nokia Alcatel-Lucent Merger
In 2015, Nokia announced the $16.6 billion merger with Alcatel-Lucent, and the deal has now closed. By Merging with ALU, the Finnish company has been able to expand in the domain of optical transmission and IP routers and switches, which are important components for building a network. A comprehensive product line with advanced research capabilities for the development for future technologies such as SDN and cloud computing is likely to give Nokia an edge over Ericsson, which currently only offers wireless networking equipment and services.
Also, the deal offers certain geographical benefits to Nokia, positioning it strongly in the U.S., China, and Europe. Alcatel-Lucent has long-standing contracts with Verizon and AT&T in the U.S., and it even holds the second-largest share in the global service provider router market after Cisco, and both these factors bode well for Nokia.
Re-entry into the smartphone market
In 2015, Nokia announced that it had signed a strategic agreement with a newly formed Finland-based company called HMD to create Nokia branded mobile phones and tablets for the next ten years. HMD has been founded to provide a focused, independent home for a full range of Nokia branded feature phones, smartphones, and tablets. Nokia had sold its mobile phone business to Microsoft in 2014, and HMD will now acquire the right to use the Nokia brand on feature phones and certain related design rights from Microsoft. It also intends to invest over $500 million in the next three years to support the global marketing of Nokia branded mobile phones and tablets.
The move makes sense due to two reasons: 1) the global growth in smartphone sales is strong; and, 2) strong customer response to its N1 tablet might have encouraged Nokia to reconsider its opportunities in the market. However, realizing that competition from leading smartphone vendors Apple and Samsung and low-cost manufacturers will not allow either easy entry or growth in the market, Nokia is letting its licensing partner do all the “heavy lifting.”
5G Can Provide A Tailwind
Operators across the world have started to outline plans for their 5G upgrades, with U.S. carriers commencing commercial deployments of the technology in 2018. For instance, AT&T and Verizon have deployed 5G mmWave services in over 30 markets by the end of 2019, while Verizon is bringing fixed 5G to homes in multiple U.S. cities. Other regions, including South Korea, China, Japan, and the Middle East, commenced their build-outs in 2019. Scoring early wins is crucial for equipment providers, as the technology is expected to have a relatively long life cycle, and Nokia has been executing fairly well in this front. For instance, as of Q1 2020, the company noted that it had 70 commercial deals and 21 live networks underway. Moreover, being a European company, it could also have a leg up over Chinese players such as Huawei and ZTE, which face regulatory hurdles in Western markets amid fears that they could give backdoor access to the Chinese government.
Internet Of Things Domain Warming Up
The IoT domain includes computing devices other than PCs, tablets, and smartphones. According to McKinsey, it is the networking of physical objects through the use of embedded sensors, actuators, and other devices that can collect or transmit information about the objects. The main factors that have contributed to the growing interconnectedness of objects are: 1) The emergence of the cloud platform, which enables the storage of large amounts of data to be transmitted and received via wired or wireless devices, and 2) The declining cost of manufacturing semiconductors, which makes their installation on frequently used unconnected devices economically feasible. Cisco estimates that the IoT market will be worth $19 trillion over the next decade, representing a $1.7 trillion market for service providers. McKinsey estimates that the impact of IoT on the global economy could be as high as $6.2 trillion by 2025. The installed base for IoT devices is estimated to grow from around 10 billion connected devices today to as many as 30 billion devices (or 50 billion as per some estimates) by 2020. While these estimates may vary, they are in agreement regarding the huge potential of the market. Clearly there is a lot of growth potential for network infrastructure players, in addition to semiconductor companies.