Following several challenging quarters, Nokia (NOK -1.48%) will start the year under a new operating model. Will that suffice for the telecom equipment giant to become a 5G stock to buy in 2021?
Challenges despite an attractive 5G opportunity
The 5G infrastructure market in which Nokia operates seems attractive. According to the research outfit MarketsandMarkets, it should grow at a compound annual rate of 67% to $47.8 billion by 2027.
Yet the 5G and network specialist has been dealing with significant difficulties over the last several quarters. As an illustration, it lost a $6.6 billion contract with Verizon Communications in September to Samsung for the supply of 5G equipment.
The U.S. telecom service provider remains an important customer for Nokia, but that event highlighted Nokia's declining competitiveness because of issues in integrating acquisitions and aligning research and development with customers' demands.
Management expects to maintain market share in 4G and 5G mobile access (mostly antennas) at 27% by the end of this year, though. However, that forecast excludes China where the company has become more prudent because of the uncertain profitability in that large market.
Thus, Nokia posted unimpressive results during the last quarter with revenue down 3% at constant currency to 5.3 billion euros. Looking forward, management didn't provide a revenue outlook, but it forecast operating margin to decrease to a range of 7% to 10% next year, compared to an anticipated range of 8% to 10% in 2020, mostly because of competitive challenges and coronavirus-induced uncertainties.
Late investments in 5G and networks
Last week, new CEO Pekka Lundmark communicated the company's updated strategy to improve competitiveness. In particular, he plans to better align investments by focusing on areas where Nokia can lead and generate profits instead of trying to provide end-to-end solutions.
It remains to be seen whether Nokia will be able to make up for its delayed 5G investments against competitors such as the European peer Ericsson (ERIC -1.33%). Indeed, Ericsson has been ramping up its research and development efforts to increase its competitiveness in the 5G market way before Nokia, which resulted in a gain of market share outside China from 32% in 2017 to 36% in 2020.
On the networking infrastructure side, Nokia will focus on critical networks by leveraging silicon and software technologies that offer customers extra flexibility compared to legacy monolithic offerings. Those choices will allow the company to remain competitive, but Nokia may be late again as networking vendors have already been embracing those technologies for quite some time.
For instance, the cloud network specialist Arista Networks and the network vendor Juniper Networks have been offering separate software and silicon-based hardware solutions for several years. And the legacy network giant Cisco Systems announced one year ago a similar offering with its Cisco Silicon One platform.
In any case, Nokia's transformation will span over several years, and management will provide more details about its long-term goals during the capital markets day on March 18.
Yet despite the risks and uncertainties related to the company's late start in its multiyear plan in improving its competitiveness, the stock is trading at 25 times trailing-12-month earnings, which isn't a bargain.
Investors should wait for a lower share price or improved results over the next couple of years before investing in the 5G stock. Alternatively, if you are looking to getting exposure to the attractive 5G market, you should consider these three 5G stocks to buy in December.