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Summary

  • Nokia's solid position in the 4-G LTE segment will allow it to benefit from the growth in this segment over the next few years.
  • The growth in the smartphones will push the demand for networking equipment up over the next five years.
  • Emerging markets represent a big opportunity for Nokia as the companies in these regions transfer to 3-G and 4-G LTE services.

Nokia's (NYSE:NOK) stock price has been extremely volatile since the start of the year, and after a fall of about 18% at the start of February, the stock has recovered almost all of its value - at the moment, Nokia's stock is down by about 0.5% year-to-date. The company will be deriving its future profitability from the networking segment after the sale of its mobile business to Microsoft (NASDAQ:MSFT). In order to look at the future of the company, it is important to gauge the long-term profitability of the networking segment and its prospects.

New Orders for Nokia Solutions and Networks {NSN}

NSN has recently signed a five year deal with Telenor. According to this deal, NSN will provide equipment and services for radio access network in order to grow their 2G, 3G and 4G Networks in Asia and Europe. NSN also signed another deal with Algerie Telecom in which it will deploy the first commercial LTE network in North Africa. With no previous presence of LTE, this means a considerable amount of equipment and detailed services representing a massive contract for NSN. Besides these, the company has signed a contract with Russia's third largest Telecom services provider to provide equipment and service to expand their 4G presence in southern and central Russia. In addition, Taiwan's biggest Telecom Company, Chinghwa Telecom, is planning to launch 4G services soon and the company has selected NSN as its primary supplier of equipment. NSN has also renewed its contract with Chinghwa Telecom for the expansion of HSPA+ network in Taiwan.

Future Demand

NSN mobile broadband's growth is primarily subject to the growth of smartphones in the world. So far in 2014, smartphones accounted for 65% of the total mobile phones sold this year. According to Ericsson's (NASDAQ:ERIC) 6th mobility report, the number of smartphones in the world is likely to grow to 5.9 billion. The current number of smartphones according to this report is roughly 2 billion. This increase in smartphones will trigger demand of data services which will in turn result in rising demand for telecom equipment. In addition, we will see a significant transition from 3G to 4G over the next five years. At present 60% of the world's population gets 3G signal. By 2019, roughly 90% of the world will get 3G signal while 60% of the smartphones would already be using 4G by then. These figures suggest that the demand for telecom equipment has a bright future over the next five years. Now we need to see where NSN stands in this market.

NSN's market share

According to ABI research, NSN currently has 22% market share in the telecom equipment and services industry. Ericsson is taking the lead with 36.6% while second is Huawei with 23% market share. There is not much difference between the market share of Nokia and Huawei, which primarily deals in this industry - but there is a huge difference when compared to Ericsson. We believe that as Nokia lets go of its smartphones segment to Microsoft, it will have a better chance of getting a bigger share in this industry as it changes focus of its resources. Therefore, we are likely to see growth in this particular segment of NSN over the next five years. Asia has the highest growth rate in telecom industry. Huawei should have an advantage in china as it is its home country. However, India and other emerging markets will present an opportunity for NSN.

Conclusion

Nokia is one of the biggest players in the networking industry and the company has a solid position in the 4G-LTE segment. As the mobile services providers move to 4G-LTE, Nokia will be one of the primary beneficiaries of this expansion. The sale of the mobile business will allow the company to focus its resources towards the networking segment, which is likely to result in substantial growth for the company. The competition is fierce in the networking industry; however, the players in this industry are focusing on specialization and capturing a certain segment of the industry - Nokia has an advantage in the 4G-LTE segment which will allow it to register growth from this segment over the next few years.

Source: Where Will Nokia's Future Growth Come From?