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Nokia’s Return to Blue-Chip Technology Status May Finally Happen

Nokia (NYSE:NOK) is a leading firm in the telecommunications equipment industry. Its network business garners revenue from selling wireless and fixed-line hardware, software and services. Nokia’s technology segment licenses its patents to handset manufacturers and makes royalties from Nokia-branded cellphones. And NOK stock is international — the Finland-based company operates on a global scale, with most of its revenue from communication service providers.

Source: rafapress / Shutterstock.com

For investing veterans, they might remember back in 2000 in the dot-com boom, the NOK stock market capitalization represented an astounding 70% of the Helsinki stock market.

Nokia owns two main businesses: First, Nokia Networks, a network infrastructure equipment supplier to global wireless and wireline operators. And second, Technologies, its patent/IPR licensing activities.

After many years of disappointing results, Nokia may finally be on track to sustainable returns that will solidify the company as a blue-chip technology firm once more. Nokia lost the smartphone battle to Apple (NASDAQ:AAPL) and Samsung. But the future of 5G and mobile infrastructure related to that buildout may be roadmap Nokia has been looking for.

Recent Results for NOK Stock

Second-quarter 2021 results for Nokia appeared to be strong across all segments. Net sales were up 9% on a year over year basis to 5.3 billion euros. Gross margins were up 2.7% to 42.3% and operating margins were up 4.5% to 12.8%.

President and CEO Pekka Lundmark wrote in the Q2 earnings, “Considering our robust start to 2021, we are revising upwards our full year Outlook. We now expect a comparable operating margin between 1012% for full year 2021, compared to our previous range of 710%.”

The company has a three-prong strategy called Reset, Accelerate, and Scale.

Reset involves:

  • Mobile Networks
    • AirScale radio and baseband launch
    • Increased R&D investment
    • Winning back customers
  • Cloud & Network Services
    • Portfolio rebalancing under way, but showing underlying profitability

Accelerate deals with:

  • Network Infrastructure • +20% sales growth in Q2*
  • Gaining market share • Further product launches in H2
  • Cloud & Network Services • Over 150 customers for 5G Core • Now over 340 private wireless deals up from 250 start of the year

Scale includes

  • Nokia Technologies • Two automotive licenses signed
  • Network Infrastructure • Sustained market share gains particularly in fixed networks

Competition for NOK Stock

The telecommunications and networking equipment industry is faced with stiff competition from a number of large players. The company states:

“We experience intense competition in every aspect of our business and across all markets for our mobile products. Mobile device markets are increasingly segmented, diversified and commoditized. We face competition from a growing number of participants in different user segments, price points and geographical markets, as well as layers of the mobile product using different competitive means in each of them.”

These competitors include such iconic names such as Ericsson (NASDAQ:ERIC), Cisco (NASDAQ:CSCO) and Samsung.

The Financials Still Have to Come to Fruition

But as always with mature companies, Nokia success relies on sustained profitability and the ability to generate solid returns on capital. This is a company that dates back to 1865. Using the modern day price-to-sales or price-to-gross margin valuation methodologies used for todays money losing companies aint’ gonna fly.

Nokia’s EV/EBITDA ratio is estimated at 11x for fiscal year 2022, according to consensus estimates which isn’t too outrageous by todays standard.

And with a positive net cash position of 3.7 billion euros, free cash flow positive and on the rise, a strong management team, a strong R&D focus, and a productive legacy patent portfolio – Nokia should be able to continue its upward march towards making itself a blue-chip technology stock.

On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.

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