3 Reasons Nokia Is Due To Rally After That Dip
Summary
- Nokia posted good first-quarter results and guidance.
- Dividend re-instatement a positive development.
- Fair value of over $6.00 for a 28.5% return discussed.
- Looking for a helping hand in the market? Members of DIY Value Investing get exclusive ideas and guidance to navigate any climate. Learn More »
AdrianHancu/iStock Editorial via Getty Images
After posting first-quarter results, Nokia (NYSE:NOK) rallied at first only to close lower on April 28, 2022. Nokia’s 20-day and 50-day moving average became resistance zones. In chart reading terms, traders are selling NOK stock whenever the stock tried to break out above the moving average. The Nasdaq’s (QQQ) bearishness is partly to blame. Nokia posted earnings that met consensus estimates as revenue grew. The Board also resolved to distribute a EUR 0.02 a share dividend. Nokia posted good results but the market did not notice. It did not issue any negative guidance, either.
There are three reasons Nokia is due to rally from the $5.00 zone despite bearish market conditions.
1. Margin Expansion
Nokia posted net sales grew by 5.3% Y/Y on a constant currency basis to EUR 5.35 billion. The network equipment firm benefited from continued, strong demand from its end markets. Supply constraints did not hurt Nokia’s margins of 10.9%. Investors should expect the company’s profitability to rise from here. After increasing its research and development investment, Nokia should realize rising revenue thanks to its stronger competitive positioning. For example, it has 5G Core business momentum in Cloud and Network Services that will continue in the quarter and the year.
In mobile networks, ReefShark is a positive gross margin driver. Nokia has more work ahead in developing the product pipeline. As it introduces new generations of software, gross margins will rise.
On the conference call, Chief Executive Officer Pekka Lundmark said that inflationary pressures worldwide would raise input costs. He said Nokia will pass those costs to customers. In the medium term, investors may build an 11% to 13.5% margin forecast.
At the low end, readers may assume EBITDA as a percentage of revenue at 11%. Nokia may achieve minimal revenue growth as shown below without much effort:
(EUR in millions) | Input Projections | |||||
Fiscal Years Ending | 21-Dec | 22-Dec | 23-Dec | 24-Dec | 25-Dec | 26-Dec |
Revenue | 22,202 | 22,602 | 23,054 | 23,399 | 23,633 | 23,870 |
% Growth | 1.60% | 1.80% | 2.00% | 1.50% | 1.00% | 1.00% |
EBITDA | 2,873 | 2,486 | 2,536 | 2,808 | 2,836 | 2,864 |
% of Revenue | 12.90% | 11.00% | 11.00% | 12.00% | 12.00% | 12.00% |
In a 5-year discounted cash flow EBITDA exit model, NOK stock has a fair value of at least $6.30. The minimum upside from here is 28.5%:
Metrics | Range | Conclusion |
Discount Rate | 8.0% - 7.0% | 7.50% |
Terminal EBITDA Multiple | 9.2x - 11.2x | 10.2x |
Fair Value | $5.83 - $6.79 | $6.30 |
Upside | 18.9% - 38.5% | 28.50% |
Model from Finbox
2. Re-affirmed outlook
For the full year, Nokia offered a net sales range of between EUR 22.9 billion and EUR 24.1 billion (US $24.1 billion to US $25.33 billion). Comparable operating margins are in the range of 11% to 13.5%. The company assumes the following addressable market:
2022 TAM (€bn) | Constant currency growth | |
Mobile Networks | 50 | 4% |
Network Infrastructure | 45 | 3% |
Cloud and Network Services | 27 | 4% |
Nokia TAM | 122 | 4% |
Data from Nokia Q1/2022 Results
Nokia assumes modest growth of 6.5% to 9.5% in Mobile Networks, 9.5% to 12.5% in Network Infrastructure, and 4% to 7% for Cloud and Network Services. Nokia Technologies will benefit from the positive timing effects in net sales for license renewals. It did not realize previously guided sales from its patent portfolio last quarter due to timing. When this returns to as much as EUR 1.5 billion (US $1.58 billion) in annualized sales, markets will notice.
Nokia said that in Q1, it had two contracts that expired that were currently in litigation. It has renewal discussions with those customers. As its portfolio strengthens, revenue from Nokia Technologies will rise. It forecasted operating margins of over 75% for the full year 2022.
3. Shanghai Reopening
Although Nokia managed the first quarter amid supply constraints, investors should watch the lockdown in the Shanghai region. It has contract manufacturing there. Fortunately, it is gradually receiving permission to start opening up. Management does not expect short-term risk factors from the Shanghai lockdown to hurt its full-year performance.
Once the market removes the lockdown discount on NOK stock, it would reverse the bearish selling momentum. In the chart below, daily volume increased as shares fell. This is a bearish pattern.
Nokia stock (Stockrover)
Chart courtesy of StockRover
The moving average convergence divergence is still negative. It takes only news of the lockdown easing for bulls to rally Nokia stock above the 50-day simple moving average.
Risks
Hardware technology firms in networking are out of favor. Cisco Systems (CSCO) is hovering near a 52-week low after posting quarterly results. It increased its buyback and hiked its dividend to 38 cents a share for a 3% dividend yield.
Ericsson (ERIC), a stock that investors should not buy due to the Iraq allegations posted poor results. In the last quarter, its profit missed expectations.
Your Takeaway
Nokia is a sleeper stick that failed to break out of the $4.60 - $6.00 range. Markets are acting as if Nokia will issue lowered guidance weeks after its quarterly report. Still, the company re-initiated its dividend. It is confident in growing its free cash flow from here.
Nokia Quant Score (SA Premium)
Nokia is due to end its downtrend. It has favorable valuation and profitability scores. Growth will improve as customers ramp up network equipment spending in 2022.
This article was written by
Chris Lau is an individual investor and economist with 30 years of experience covering life science, technology, and dividend-growth income stocks. He has degrees in Microbiology and Economics.
Chris runs the investing group DIY Value Investing where he shares his top stock picks of undervalued stocks with catalysts for upside, dividend-income recommendations with quant and payment calendar tracking, high upside plays, and research requests to help you become a better do-it-yourself investor. Learn more.Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in NOK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (20)
Revenue of €5.9B (+11.1% Y/Y) beats by €290M.
Gross margin of 40.6%, Operating margin 12.2%.
Re-affirms FY22 outlook: FY net sales outlook is EUR 23.5bn to EUR 24.7bn.
Comparable operating margin guidance remains 11% to 13.5%.
Segment Op. margin guidance: Mobile Networks 6.5-9.5%.
Network Infrastructure 9.5-12.5%.
Cloud and Network Services 4.0-7.0%.
Nokia Technologies >75%.
Free cash flow of 25-55% conversion from comparable operating profit.
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