Nokia Investment Summary

Nokia has been constantly adapting its strategy to change in the market. Based on the current NOK stock price $5.6-$5.8, and the analysis of fair values, $NOK is a buy. We have put more weightage on Comps analysis as compared to DCF analysis here, because Nokia has recently changed its strategy and started benefitting from the growing 5G market, thus the true value of Nokia’s potential growth would not be reflected by its past performance.

About Nokia’s Transitions

From its humble beginning in 1865 as a single paper mill operation, Nokia has found and nurtured success over the years in a range of industrial sectors including cable, paper products, rubber boots, tires, televisions, and mobile phones.

Nokia’s transition to a primary focus on telecommunications began in the 1990s. The first GSM call was made in 1991 using Nokia equipment. Rapid success in the mobile phone sector allowed Nokia to become by 1998, the best-selling mobile phone brand in the world.

In 2003 Nokia introduced the first camera phone. In 2011, to address increasing competition from iOS and Android operating systems, Nokia entered into a strategic partnership with Microsoft. In 2014 Nokia sold its mobile and devices division to Microsoft.

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Highlights from 2020

In 2020, Nokia had three reportable segments for financial reporting purposes:

1. Networks: Net sales in 2020 were EUR 21.85 million, a decrease of EUR 1.46 million, or 6%, compared to EUR 23.32 million in 2019. The decrease in net sales was primarily due to a decrease in Networks net sales, and, to a lesser extent, a decrease in Nokia Software and Nokia Technologies net sales. Gross profit in 2020 was EUR 8.19 million, a decrease of EUR 71 million, or 1%, compared to EUR 8.26 million in 2019.
2. Nokia Software: Nokia Software net sales in 2020 were EUR 2.66 million, a decrease of EUR 111 million, or 4%, compared to EUR 2.77 million in 2019. The decrease in Nokia Software net sales was primarily due to core networks and applications. Nokia Software gross profit in 2020 was EUR 1.38 million, a decrease of EUR 71 million, or 5%, compared to EUR 1.45 million in 2019.
3. Nokia Technologies: Nokia Technologies net sales in 2020 were EUR 1 402 million, a decrease of EUR 85 million, or 6%, compared to EUR 1 487 million in 2019. The decrease in Nokia Technologies net sales was primarily due to lower brand licensing net sales and lower catch-up net sales. Nokia Technologies gross profit in 2020 was EUR 1 393 million, a decrease of EUR 66 million, or 5%, compared to EUR 1 459 million in 2019.

Competitors

• Telefonaktiebolaget LM Ericsson (ERIC): Ericsson, together with its subsidiaries, provides communication infrastructure, services, and software solutions to the telecom and other sectors. It operates through four segments: Networks, Digital Services, Managed Services, and Emerging Business and Other.
• Huawei Culture Co.,Ltd.: Huawei engages in the TV and animation businesses in the People's Republic of China and internationally. It is also involved in the production and releasing of teleplay, supplemented by online teleplays; and research and development, and operation of mobile online games
• International Business Machines Corporation (IBM): International Business Machines Corporation provides integrated solutions and services worldwide. Its Cloud & Cognitive Software segment offers software for vertical and domain-specific solutions in various application areas; and customer information control system and storage, and analytics and integration software solutions to support client mission on-premise workloads in banking, airline, and retail industries.
• Cisco Systems, Inc. (CSCO): Cisco designs, manufactures and sells Internet Protocol-based networking and other products related to the communications and information technology industry in the Americas, Europe, the Middle East, Africa, the Asia Pacific, Japan, and China.
• Oracle Corporation (ORCL): Oracle provides products and services that address enterprise information technology environments worldwide. Its Oracle cloud software as a service offering include various cloud software applications
• Motorola Solutions, Inc. (MSI): Motorola Solutions provides mission-critical communications and analytics in the United States, the United Kingdom, Canada, and internationally. The company operates in two segments, Products and Systems Integration, and Services and Software.

 Fair Value of NOK Stock  

Comps Analysis:

P/E

NOK had negative Earnings in 2017, 2018 and 2020, so comps analysis on standard P/E will not be insightful.

P/S

Peer analysis with comparable companies based on P/S multiple suggests that NOK stock is undervalued. NOK’s fair value by P/S analysis ranges from $14.86 to $23.0, averaging at $18.44.

EV/EBITDA

By comparing NOK’s EV/EBITDA multiple to that of competitors, fair value for the Nokia stock from $5.83 to $20.20, averaging at $11.9.

DCF Analysis:

Owing to the growth prospects listed above and by going through various online resources, following assumptions can be made about NOK:

Assumptions:

Revenue Growth Rate: Revenue growth rate is expected to be high initially owing to the 5G market and it would gradually stabilize over 10 years. Thus revenue is assumed to grow from 10% initially to 1.5% in the year 2030. With perpetual growth rate at 1.5%.

COGS: Cost of revenue is set at 62% - taken as the average of percentage COGS/Revenue from 2017-2020.

Operating Efficiency Increase: Operating Expense is calculated on the basis of target Operating Income set by Nokia. Nokia aims to increase its operating income to 7-10% in 2021 and between 10-13% starting 2023.

WACC:

WACC of NOK is between 6.5-7.5%- from finbox. The calculated WACC is 6.33% based on cost of debt, cost of equity and debt to capital ratio.

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Taking into consideration the average growth rate of RSI over past years and industry average of public companies, following assumptions have been made for Asset growth rate and Liability Growth Rate for upto year 2030.

Asset Growth Rate: averaging at 1%

Liability Growth Rate: averaging at 1%

PPE Growth Rate: averaging at 7%

D/A Growth Rate:  calculated based on PPE and Net PPE, averaging at 53.95%

Fair Value:

Based on above assumptions the fair value of Nokia stock is $6.86. The sensitivity analysis of variation in assumptions can be checked in attachments below.

Football Field:

NOK Stock Analysis Summary

Based on our analysis, NOK stock is a buy because it is undervalued. We have put more weight on Comps analysis as compared to DCF analysis because Nokia is changing its strategy and pivoting to Mobile Network, Network Infrastructure and Cloud and Network Services as well as benefiting from the growing 5G market. Based on past performance DCF would result in undervaluing the stock. Below is the summarized price range of NOK stock based on various analyses, which can also be represented in the football field (image attached below).

Sources:

Utradea - Nokia Stock Page

Original Post

Sec Report

Nokia Investor Presentation

https://www.investing.com/equities/nokia-corp-exch

https://www.marketbeat.com/stocks/NYSE/NOK