Nokia (NYSE:NOK) has been range bound over the last three months - the stock has been trading between $7.30-8.30, with considerable volatility. However, despite the volatility, the overall trend of the stock price has been upwards over the last twelve months. We are expecting further upward movement as the growth in business is looking strong over the next few months.
The company is on track to achieve growth as new orders are coming from greater China. Since the start of this year, the orders have been piling up for Nokia. In our previous article, we discussed its contract to deploy 3G networks in Africa. In the second quarter, the company reported the completion of that contract. The other contract with Telenor is ongoing and will last for 4 more years. In this article, we will look into the fresh order backlog of the company and see what it means for the future growth of Nokia. Further, we will look into the network industry dynamics and Nokia's market share.
Order Backlog is Showing Impressive Growth
Nokia's order backlog is growing at an exceptional rate - the first and the most important contract is with China Mobile (NYSE:CHL). Nokia is helping China Mobile deploy 4G networks in 18 provinces, which includes bigger cities such as Guangdong, Shanghai and Beijing. Nokia is the only non-Chinese company to get a double-digit share in the TD-LTE second phase. Even in the second quarter, this segment showed the highest growth figures. The net sales of the company rose by 18% in Greater China thanks to this contract and are expected to increase further.
Followed by this segment is Asia-Pacific with 5% growth in revenue. The rest of the segments actually posted year-over-year declines in revenues. However, the next quarter should be a good one for the company as it has won a number of contracts in other regions as well. Nokia signed contracts with Zain, a multinational operator. Under these contracts, Nokia will be deploying single Ran Advanced solutions, Flexi Zone small cells, Flexi Compact Base stations, Liquid applications and other related services. Nokia's liquid application is first of its kind in the Middle East and Africa giving it an advantage in the market. With Zain, the company will deploy its operation support system portfolio and other related services so that Zain can provide high quality service. Unlike other contracts, this contract will be ongoing.
At the end of the second quarter, Nokia had 145 commercial LTE contracts - the company had 138 commercial LTE contracts at the end of the first quarter. This shows considerable growth in contracts and the ability of the company to procure new contracts. Based on these figures, we believe that third quarter will show a considerable increase in sales. Nokia expects to achieve the higher end of its 5%-10% revenue growth guidance.
The company also is focusing on the long-term growth along with the short-term revenue growth. Nokia is working with NTT DoCoMo to develop a 5G concept system. At the moment, we are seeing solid growth in 4G and 4G-LTE networks and we might see demand for 5G concept systems as the demand for faster data connections grows. A number of companies are working on the concept including the Chinese giant Huawei. If Nokia manages to develop the technology, it will be highly beneficial for the company and give it the first mover advantage.
Nokia's Market Share
According to ABI, Nokia held 22% market share behind Ericsson (NASDAQ:ERIC) and Huawei by the end of the last year. However, IDC suggests that Nokia may have a better chance in the market than Huawei. The study from IDC is much more complex and considers many things. It is focusing on the strategies of the company and future prospects. The image below shows the position of different players in the LTE segment.
The X-axis represents vendor's capabilities and range of services and how they align with their customers' needs. On the other hand, y-axis reflects the alignment of vendors' strategies with what their potential customers might want in the next 5 years. Nokia is at second place behind Ericsson and IDC believes Nokia will perform better than Huawei. Even in terms of market share, there was only a 1 percentage point difference between Huawei and Nokia - we might see a change in the overall position of the companies as Nokia has shown some remarkable performance throughout the year.
Based on the company's current performance and its future orders, we are optimistic about its future growth. Nokia will grow at a rapid pace without the handsets segment dragging it down. The market for 3G and 4G is growing at an attractive rate and it is one of the most attractive segments in the sector. Nokia has a strong position in this sector and we see solid potential for the company to grow over the next few quarters. Solid order backlog will allow the company to meet its full year revenue and earnings guidance. The growth in revenues and earnings will support the rise in the stock price, and we believe Nokia will continue to rise over the next few months.
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