Summary

• Nokia posted good first-quarter results and guidance.
• Dividend re-instatement a positive development.
• Fair value of over $6.00 for a 28.5% return discussed.

Source: Unsplash 

After posting first-quarter results, Nokia (NYSE:NOK) rallied at first only to close lower on April 28, 2022. Nokia’s 20-day and 50-day moving average became resistance zones. In chart reading terms, traders are selling NOK stock whenever the stock tried to break out above the moving average. The Nasdaq’s (QQQ) bearishness is partly to blame. Nokia posted earnings that met consensus estimates as revenue grew. The Board also resolved to distribute a EUR 0.02 a share dividend. Nokia posted good results but the market did not notice. It did not issue any negative guidance, either.

There are three reasons Nokia is due to rally from the $5.00 zone despite bearish market conditions.

1. Margin Expansion

Nokia posted net sales grew by 5.3% Y/Y on a constant currency basis to EUR 5.35 billion. The network equipment firm benefited from continued, strong demand from its end markets. Supply constraints did not hurt Nokia’s margins of 10.9%. Investors should expect the company’s profitability to rise from here. After increasing its research and development investment, Nokia should realize rising revenue thanks to its stronger competitive positioning. For example, it has 5G Core business momentum in Cloud and Network Services that will continue in the quarter and the year.

In mobile networks, ReefShark is a positive gross margin driver. Nokia has more work ahead in developing the product pipeline. As it introduces new generations of software, gross margins will rise.

On the conference call, Chief Executive Officer Pekka Lundmark said that inflationary pressures worldwide would raise input costs. He said Nokia will pass those costs to customers. In the medium term, investors may build an 11% to 13.5% margin forecast.

At the low end, readers may assume EBITDA as a percentage of revenue at 11%. Nokia may achieve minimal revenue growth as shown below without much effort:

Model from Finbox

In a 5-year discounted cash flow EBITDA exit model, NOK stock has a fair value of at least $6.30. The minimum upside from here is 28.5%:

Model from Finbox

2. Re-affirmed outlook

For the full year, Nokia offered a net sales range of between EUR 22.9 billion and EUR 24.1 billion (US $24.1 billion to US $25.33 billion). Comparable operating margins are in the range of 11% to 13.5%. The company assumes the following addressable market:

Data from Nokia Q1/2022 Results

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