VALUATION HIGHLIGHTS

1. Licensing constitutes 44% of the Trefis price estimate for Nokia's stock.
2. Networks constitute 40% of the Trefis price estimate for Nokia's stock.

WHAT HAS CHANGED?

1. Latest Earnings: FY 2022 Results

Nokia delivered a steady performance for FY 2022. Nokia's total revenue rose to €24.9 billion from €22.2 billion. Further, gross margins and operating margins improved strongly over this period, as R&D and SG&A expenses stayed under control. Due to this, net profits rose to €2.48 billion from €2.11 billion over this period.

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:

Nokia Networks

• Networks EBITDA Margin:
  Networks' Wireless EBITDA margins declined from about 16% in 2015 to about 11% in 2020, driven by higher competition from Chinese players such as Huawei and ZTE, which forced Nokia to reduce its prices. However, margins surged in 2021 to 14.2% but dropped back to 9.6% in FY 2022, and we expect the metric to maintain this level till the end of our review period, driven by higher sales of 5G equipment and solutions. If the metric rises to about 13% in the same period, it could bolster our price estimate by about 20%. On the other hand, if margins drop to around 7%, our price estimate could decline by 20%.

Licensing

• Licensing Revenues: Nokia's licensing revenues have grown rapidly from EUR 100 million in 2010 to EUR 1.2 billion in 2021, with the biggest jump coming in 2017. The number grew to about EUR 1.6 billion in 2022, driven partly by new licensing agreements and the settlement with Apple. 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 a significant upside to our price estimate if Nokia manages to leverage its robust patent portfolio more efficiently. If Nokia manages to increase its licensing revenue to EUR 2.5 billion in the long run, there could be an upside of more than 20% 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.

BUSINESS SUMMARY

Finland-based Nokia was once the largest mobile phone manufacturer globally. However, the handset business was officially transferred to Microsoft in 2014, making 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 since the completion of the merger, Nokia has become one of the biggest players in the telecom gear industry.

SOURCES OF VALUE

Sizeable profits from licensing business

The licensing division of Nokia contributes just 10% 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 14%. 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.

KEY TRENDS

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.

Re-entry into the smartphone market

In 2015, Nokia announced that it had signed a strategic agreement with a newly formed Finland-based company, HMD to create Nokia-branded mobile phones and tablets for the next ten years. HMD was founded to provide a focused, independent home for a full range of Nokia-branded feature phones, smartphones, and tablets.

The move makes sense for 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.”

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 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. There is a lot of growth potential for network infrastructure players, in addition to semiconductor companies.