Nokia stock (NYSE: NOK) lost more than 35% – dropping from $4 at the beginning of the year to nearly $2.50 in late March – then spiked 100% to around $5 now. But that means the stock has not only recovered, but it is 35% higher than where it started the year while the broader market is up 5%.
Why is Nokia outperforming the broader market? Nokia primarily operates in the telecom industry and the telecom business has remained relatively immune from the impact of Covid-19. This is also evident from Nokia’s peer, Ericsson’s stock price movement, which has also outperformed the broader market. Nokia and Ericsson are the leaders in the 5G technology space and as demand for 5G services increases, the market revised their expectations-helping the stock outperform. Moreover, the multi-billion dollar Fed stimulus provided a floor, and the stock recovery owes a part to that.
But has the stock run its course or is there room for growth? It seems to have run its course. Trefis estimates Nokia’s valuation to be around $5 per share – similar to the current market price -based on upcoming triggers explained below and one major risk factor.
- Can Nokia Stock Continue Weathering The Storm In The Broader Markets?
- Can Nokia Stock Continue Its Post-Earnings Outperformance?
- What’s Next For Nokia Stock After 7% Drop In The Past Month?
- What’s Next For Nokia Stock After 14% Rise Last Month?
- What’s Next For Nokia Stock After 5% Drop Last Week?
- Forecast Of The Day: Nokia’s Licensing Revenue
The first trigger we see is cost-cutting efforts helping Nokia’s net margins rise to close to 6.5% for 2020 with the figure further improving to around 7% in 2021. Nokia’s margins have steadily decreased over the years (8% in 2017, then 5% in 2019), so where is this sudden, predictable cost saving from? The absence of restructuring charges and improved gross margin resulting from broad-based strength in Networks’ business, is likely to result in significant cost savings for the company.
The second trigger is relatively stable Nokia’s revenues over the year. We expect the company to report €23.4 billion in revenues for 2020 – slightly higher than the figure the company reported in 2019. While companies in other industries are fighting for survival, Nokia’s resilient business model will help the company grow its revenue despite the pandemic. Our forecast stems from the belief that the company’s business will remain immune from the outbreak of coronavirus as sales of 5G equipment in North America and Asia will remain strong. After all, the company’s networks division accounts for nearly 94% of total revenues. Overall, we see the company reporting an EPS in the range of €0.26 for FY 2020.
Thereafter, Nokia’s revenues are expected to increase to €23.7 billion in FY2021, mainly due to steady growth across all operating segments. Further, the net income margin is likely to improve due to improved profitability as Nokia remains focused on reducing its costs across all operating heads, leading to an EPS of €0.30 for FY2021.
Finally, how much should the market pay per dollar of Nokia’s earnings? Well, to earn close to $0.27 (exchange rate of €/$ 1.10) per year from a bank, you’d have to deposit about $27 in a savings account today, so about 110x the desired earnings. At Nokia’s current share price of roughly $5, we are talking about a P/E multiple of almost 15x, and we think the figure is appropriate.
That said, telecom hardware is a slow-growing business. Growth looks less promising, and long-term prospects are less than rosy. What’s behind that?
The economic downturn could cause significant losses for businesses, and the companies might delay the adoption of 5G technology and hardware upgradation. This could result in sizable losses for Nokia, as the company derives a bulk of its revenues from its networks division. Moreover, the company’s network business has been its largest growth driver while its Licensing business has been struggling. Further, we believe the market has already priced in Nokia’s growth and risk drivers, and the company’s stock looks fairly valued at its current levels.
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