3 Convincing Reasons To Buy Nokia On The Pullback

Jul.22.14 | About: Nokia Corporation (NOK)


Nokia has got strong end-market prospects, and it is landing a number of new deals.

Nokia is expanding into markets such as location services and connected cars.

Nokia has got sound fundamentals and solid earnings growth expectations.

It is surprising to see that Nokia (NYSE:NOK) has underperformed the market this year. The growth in data consumption around the globe should have led to a jump in Nokia's business, especially after it let go of its devices business to Microsoft (NASDAQ:MSFT). Nokia, however, hasn't delivered much this year despite the expectations, as its shares are in the red. However, the stock has proven to be a profitable investment over the past year, delivering gains of almost 90%. But, the question is, will Nokia be able to deliver going forward, or will it falter? Let's find out.

Solid opportunities and new deals

Nokia sees plenty of opportunities due to the growing usage of LTE and IP Licensing. Its business now consists of three divisions - Nokia Solutions and Networks, HERE, and advanced technology. Nokia is experiencing strong momentum across these segments, and expects to return to growth in the second half of the year.

In addition, Nokia landed several new deals in the first quarter of fiscal 2014, such as a five-year contract with Vodafone (NASDAQ:VOD) as a part of its Project Spring network upgrade. It also won an LTE contract from Everything Everywhere in the U.K., VimpelCom in Russia, Taiwan Mobile, and TELE Greenland, and Avantel in Colombia. These deals indicate that Nokia's business is gradually gaining momentum.

The company also has a handful of unannounced contract wins in Europe that should help it stabilize its sales in the second half of the year. Management is of the opinion that though the progress is slow in Europe, its win rate is high. Additionally, Nokia is seeing a significant fall in the rate of sales decline across most its end markets, and remains confident of putting in a solid performance in the second half of the year.

The company should continue seeing such strong orders going forward, as the demand for telecom equipment is expected to grow significantly in the future. Many telecom providers are undergoing transition to 4G LTE from 3G, which is creating the need for more data centers and related equipment. To tap this market, Nokia has said that it will be investing selectively in strategic deals that will deliver stronger value to its business in the long run, irrespective of short-term effects, which looks like a good move.

Broadband and location services are catalysts

Nokia's broadband mobile unit is illustrating robust growth, driven by LTE sales. Also, the company is witnessing strong momentum in its core business, driven by demand for its mainstream products. Besides, Nokia now expects its next generation virtualized products to supplement its positive momentum going forward.

Nokia's location service business is also on a roll, as the company is moving into markets such as connected cars. Its Connected Driving solutions enable car makers and in-vehicle technology suppliers to connect the car and the driver to the cloud, bringing them online. Nokia has benefited from this business due to strong auto sales in the European markets, as well as from the conversion of one of its contracts to a perpetual license. Further, Nokia expects stronger opportunities in this market as it evolves toward assisted driving, and ultimately to automated driving.

Fundamentals and final words

Moreover, Nokia has solid fundamentals. It currently trades at a forward P/E of 20, with a PEG ratio of 0.16. This signifies that the company has the potential to deliver solid growth in the future. Also, analysts have forecasted that Nokia's bottom line will grow at a CAGR of 164.60% for the next five years, nine times higher than industry average CAGR of 18.24%. Nokia's cash position is also very strong at $9.5 billion.

Hence, investors should certainly think of utilizing Nokia's weak performance in 2014 as an opportunity to add more shares to their portfolio.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.