As 5G network deployment gains momentum, driven by broad demand amid a rapid digital transformation globally, Nokia Corporation (NOK) and Telefonaktiebolaget LM Ericsson (ERIC) are strategically positioned to benefit. With business enterprises heavily dependent on next generation networking to meet remote working and entertainment requirements, we believe these companies are positioned nicely to outperform the broader market. But let’s find out which of these names is a better buy now.

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Nokia Corporation (NOK - Get Rating) and Telefonaktiebolaget LM Ericsson (ERIC - Get Rating) are two renowned multinational telecommunications and networking companies, operating worldwide. Founded in 1865, NOK operates through Mobile Networks, Network Infrastructure, Cloud and Network Services, and Nokia Technologies segments. ERIC operates through four segments: Networks, Digital Services, Managed Services, and Emerging Business and Other.

5G technology is expected to witness widespread adoption this year as increasing numbers of organizations adopt the new network standard and edge computing to improve their accessibility and connectivity. As the next phase of digital transformation develops, a blend of cloud computing and 5G networks is becoming increasingly vital in supporting a digitally interconnected economy. Hence, wireless telecommunication providers such as NOK and ERIC, which are making strategic investments in 5G, are expected to witness robust demand.

While NOK has returned 33.6% over the past year, ERIC gained 80.7%. In terms of the past three months’ performance, ERIC is the clear winner with 11.9% gains versus NOK’s 2.3% returns. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

This month,  NOK partnered up with Circle Fiber to deploy 10 Gigabit broadband to 125,000 premises in Southeast Missouri. This should allow NOK to provide a fiber-to-the-premise network that will offer its customers a seamless internet experience at home or in the office.

Also this month, NOK, along with Key Bridge, introduced a fully integrated CBRS solution that allows communications service providers (CSPs), multiple-system operators (MSOs), and enterprises to benefit from their investments in the CBRS spectrum. This should complement the company’s diverse portfolio and solidify NOK’s commitment to broader private wireless opportunities.

This month, ERIC’s 5G Smart Factory in Lewisville, Tex., was identified as a global front runner in the Fourth Industrial Revolution (4IR), by the World Economic Forum. The company was awarded the Global Lighthouse designation in recognition of its deployment of next-generation technology at the factory.

ERIC  recently collaborated with Telenet to deliver a 5G radio access network across Belgium. As a part of the agreement, Telenet will also use Eric’s technology leadership to modernize its network. Because the 5G revolution is playing a critical role in Belgium’s digital ambitions, this partnership will enable ERIC to strengthen its position in the international market and drive growth.

Recent Financial Results

In the fourth quarter, ended December 31, NOK’s net sales decreased 5% year-over-year to €6.57 billion, attributable primarily to a decline in network deployment and planning services. NOK’s gross margin rose 70 basis points from its year-ago value to 39.2%, while its net cash and current financial investments rose 44% year-over-year to €2.49 billion.

ERIC’s sales adjusted for comparable units and currency grew 13% year-over-year to SEK69.6 billion in the fourth quarter ended December 31, driven mainly by sales in North-East Asia, Europe, and North America. The company’s gross margin improved to 40.6% from 36.8% in the prior-year quarter. Its net income rose 60% year-over-year to SEK7.2 billion, while its EPS increased 70% from the year-ago value to SEK 2.26.

Past and Expected Financial Performance

NOK’s levered free cash flow grew at a CAGR of 8.1% over the past three years. In comparison, the CAGR of ERIC’s levered free cash flow has been 14.4% over this period.

Analysts expect NOK’s revenue to increase 7.8% in the current quarter, 2.7% in the current year, and 1.4% next year. NOK’s EPS is estimated to decrease 20.7% in fiscal 2021 and increase 26.1% in 2022.

ERIC’s revenue is expected to increase 26.5% in the current quarter, 14.3% in 2021, and 3.6% in 2022. A consensus EPS estimate of $0.73 for the current year represents 15.9% improvement from the same period last year.

Profitability      

ERIC’s trailing-12-month revenue is 1.05 times higher than NOK’s. Also, ERIC is more profitable with a gross profit margin of 40.6% versus NOK’s 39.3%.

Furthermore,  ERIC’s EBITDA margin of 14.8% compares favorably with NOK’s 11.9%.

Valuation

In terms of forward non-GAAP PEG, NOK is currently trading at 2.03x, 4.6% higher than ERIC, which is currently trading at 1.94x. However, in terms of trailing-12-month ev/sales, ERIC’s 1.53x is 93.7% higher than NOK’s 0.79x. ERIC is also more expensive in terms of trailing-12-month price/cash flow (12.72x vs 10.70x).

Even though ERIC looks much more expensive than  NOK, we think it’s worth paying this premium considering ERIC’s significantly higher earnings growth potential.

POWR Ratings

ERIC has an A overall rating, which equates to a Strong Buy in our proprietary POWR Ratings system. However, NOK has a C overall rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

In terms of Value Grade, both NOK and ERIC have a B, consistent with their lower-than-industry p/e ratios.

Also, in terms of Growth Grade, both NOK and ERIC have a B, which is consistent with their expected growth in earnings and revenue.

ERIC has an A  Sentiment Grade, which is in sync with the analysts’ expectations about its earnings and revenue growth. In comparison,  NOK has a Sentiment Grade of C.

Of the 55 stocks in the B-rated Technology – Communication/Networking industry, ERIC is ranked #3 while NOK is ranked #28.

In addition to what we’ve stated above, our POWR Ratings system also rate both ERIC and NOK for Quality, Stability, and Momentum. Get the ratings for ERIC here. Also, click here to see the additional POWR Ratings for NOK.

The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.

The Winner

While both ERIC and NOK are good long-term investments considering their diverse portfolios and strong positions in 5G technology, ERIC appears to be a better buy based on the factors discussed here. Even though NOK is a relatively cheaper option to bet on the 5G market’s immense growth, we think ERIC’s impressive financials and higher profitability make it a better investment option now.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. If you’re looking for other top-rated stocks in the Technology – Communication/Networking industry, click here.

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ERIC shares were trading at $13.20 per share on Tuesday afternoon, down $0.17 (-1.27%). Year-to-date, ERIC has gained 10.46%, versus a 5.72% rise in the benchmark S&P 500 index during the same period.