Please ensure Javascript is enabled for purposes of website accessibility

Where Will Nokia Stock Be in 1 Year?

By Leo Sun - Feb 11, 2021 at 7:30AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Finnish telecom equipment company is still struggling with its past mistakes.

Nokia's (NOK 2.17%) stock briefly hit a two-year high in late January due to a market-wide short squeeze that also lifted shares of GameStop, BlackBerry, and other beaten-down companies.

But Nokia's gains were ephemeral, and the stock price remains down about 4% over the past 12 months. As that volatility ends, investors might be wondering if the Finnish telecom equipment maker is still a worthy investment. Let's tune out the near-term noise and see where Nokia's stock could be in a year.

Reviewing Nokia's challenges

Nokia sold its mobile phone unit to Microsoft (MSFT 2.83%) in 2014, then purchased its rival Alcatel-Lucent in 2016 to expand its networks business, which provides telecom equipment and services to carriers.

Nokia CEO Pekka Lundmark.

Nokia CEO Pekka Lundmark. Image source: Nokia.

Nokia's $16.6 billion acquisition of Alcatel-Lucent expanded its portfolio and increased its market share. However, Nokia focused too much on cutting costs as it integrated Alcatel-Lucent, which caused it to fall behind its rivals in 5G investments. It suspended its dividend in late 2019 to free up more cash to strengthen its 5G business, but the 11th-hour effort was too little and too late.

As a result, Nokia's market share shrank as big wireless carriers upgraded their 5G networks. Between the end of 2019 and the third quarter of 2020, Nokia's share of the global telecom equipment market fell from 16% to 15%, according to Dell'Oro Group -- putting it in second place behind Huawei.

Huawei's share rose from 28% to 30%, Ericsson's (ERIC 2.96%) share held steady at 14%, and ZTE's (ZTCOY) share increased from 9% to 11%. Chinese tech giants Huawei and ZTE both faced blacklists and sanctions, but they both offset their overseas losses with gains within China.

That's probably why China Mobile, the country's largest wireless carrier, dropped Nokia from its second round of 5G upgrades last year. But Ericsson, which streamlined its portfolio to focus more on selling radio access network gear, didn't lose any major contracts in China.

A murky future

Nokia's CEO Rajeev Suri resigned last July and was succeeded by Pekka Lundmark, who previously led the Finnish energy company Fortum.

An artist's conception of a 5G chip.

Image source: Getty Images.

Nokia's revenue fell 6% (and decreased 4% in constant currency terms) in 2020. But its gross and operating margins improved, and its adjusted earnings grew 18%.

By comparison, Ericsson's revenue rose 2% (and grew 5% in constant currency terms) in 2020, its gross and operating margins also expanded, and its earnings jumped nearly eightfold.

Nokia mainly attributed its declines throughout 2020 to soft demand for its network deployment and planning services, which was only partly offset by higher demand for its 5G radio access products.

By region, Nokia's double-digit revenue declines in the Latin America, Asia-Pacific, and Greater China regions offset its tepid growth in other markets. Nokia now excludes China from its 4G/5G market share calculations, which suggests it's surrendering the market to Huawei, ZTE, and Ericsson.

In Nokia's annual report, Lundmark said the company expects 2021 to be "challenging, a year of transition, with meaningful headwinds due to market share loss and price erosion in North America." Lundmark also warned that Nokia would need to "make further 5G R&D investments in 2021" and "sacrifice some short-term margin" to stay competitive. Faced with those challenges, Nokia doesn't plan to reinstate its dividend anytime soon.

Nokia expects its revenue to decline 0%-6% in 2021, with a comparable operating margin of 7%-10% -- compared to 9.7% in 2020. Analysts expect its revenue and earnings to decline 2% and 23%, respectively, for the full year.

Ericsson is faring much better than Nokia. Analysts expect Ericsson's revenue and earnings to rise 3% and 6%, respectively, in 2021. Ericsson also posted a much higher comparable operating margin of 12.5% in 2020, and it continues to pay its dividend.

Ericsson looks healthier than Nokia because it isn't struggling with acquisition indigestion, it wisely ramped up its 5G investments at the right time, and it divested its weaker businesses. Those strengths put Ericsson in a better position to profit from the secular growth of the 5G market, and it might gain more business from former Huawei and ZTE customers in non-Chinese markets than Nokia.

2021 will be another rough year for Nokia

Nokia trades at about 17 times forward earnings, while Ericsson has a slightly higher forward P/E ratio of 20. But Nokia is cheaper for obvious reasons, and Ericsson's strengths easily justify its higher multiple.

Investors should have sold Nokia when it popped in late January. Those who didn't should expect another sluggish year as the company tries to keep pace with its better-run rivals in the competitive 5G market.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Nokia Corporation Stock Quote
Nokia Corporation
$4.93 (2.17%) $0.10
Microsoft Corporation Stock Quote
Microsoft Corporation
$259.70 (2.83%) $7.14
BlackBerry Stock Quote
$5.91 (0.26%) $0.01
Telefonaktiebolaget LM Ericsson (publ) Stock Quote
Telefonaktiebolaget LM Ericsson (publ)
$8.00 (2.96%) $0.23
ZTE Corporation Stock Quote
ZTE Corporation

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.