Nokia's (NYSE:NOK) stock recently rallied after the Finnish telecom equipment maker's first-quarter numbers beat analysts' expectations. Its revenue rose 3% year over year to 5.08 billion euros ($6.1 billion), beating estimates by 360 million euros. Its revenue also grew 9% in constant-currency terms.

Its gross and operating margins expanded, its comparable net profit jumped from 33 million euros to 375 million euros ($451 million), and its adjusted EPS of 0.07 euros cleared estimates by 0.06 euros.

Do those growth rates indicate that Nokia, which fumbled its 5G expansion over the past few years, is finally turning a corner?

An illustration of wireless connections across a city.

Image source: Getty Images.

Reviewing Nokia's previous problems

After selling its struggling mobile phone unit to Microsoft in 2014, Nokia acquired Alcatel-Lucent for $16.6 billion in 2016 to expand its core networking equipment business.

That acquisition boosted Nokia's market share, but it struggled to integrate Alcatel-Lucent's business and focused too heavily on cutting costs instead of investing in new 5G technologies.

As a result, it fell behind Huawei and Ericsson (NASDAQ:ERIC) in the 5G race. Nokia suspended its dividend in late 2019 to free up more cash to catch up, but its market share continued to decline.

Global Telecom Equipment Market Share

2019

2020

Huawei

28%

31%

Nokia

16%

15%

Ericsson

14%

15%

ZTE

9%

10%

Data source: Dell'Oro Group.

Nokia also lost contracts in China amid the trade war, as many Chinese companies switched to domestic suppliers like Huawei and ZTE (OTC:ZTCOY). Yet Ericsson retained most of its major Chinese contracts.

Nokia's revenue dropped 6% last year amid those headwinds, but its gross and operating margins expanded as it cut costs and streamlined its business throughout the pandemic.

Metric

2019

2020

Change (YOY)

Revenue (in euros)

23.3 billion

21.9 billion

(6%)

Gross Margin*

36.5%

39%

250 bps

Operating Margin*

8.6%

9.7%

110 bps

Data source: Nokia. YOY = Year over year. BPS = basis points. *Non-IFRS basis.

Reviewing Nokia's progress

Nokia's first-quarter growth beat expectations, but that was mainly due to an easy comparison to the start of the pandemic a year ago. If we take a closer look at its four main businesses, its Mobile Networks and Cloud & Networks segments continued to struggle and partly offset the expansion of its healthier Network Infrastructure and Nokia Technologies segments.

Business Segment

Q1 2021 Revenue (in euros)

Growth (YOY)

Mobile Networks

2.26 billion

(4%)

Network Infrastructure

1.73 billion

22%

Cloud and Network Services

674 million

(9%)

Nokia Technologies

365 million

5%

Data source: Nokia.

For the full year, Nokia reiterated its previous guidance for a 0%-6% drop in revenue, with an adjusted operating margin of 7%-10%.

During the conference call, CEO Pekka Lundmark noted that 2021 would be a "year of transition" as Nokia expands its 5G business and upgrades its cloud and network services.

An illustration of a 5G chip.

Image source: Getty Images.

Fiscal 2022 will likely be another transitional year, but Nokia expects its revenue to finally grow "faster than the market" on a constant-currency basis in 2023. It expects its adjusted operating margin to hit 10%-13% that year, with expanding operating margins across all four of its units.

Nokia expects the expansion of the 5G market to drive that growth. It's already secured 160 commercial 5G deals and 63 live 5G network deployments, and it expects that figure to continue climbing as more carriers expand their 5G networks.

It could also eventually offset its loss of customers in China, which it now excludes from its own market share calculations, by pulling customers away from Huawei and ZTE in non-Chinese markets.

But Ericsson, which generated much stronger sales growth than Nokia last year, is also targeting many of the same customers. Analysts expect Ericsson's revenue and earnings to rise 10% and 16%, respectively, this year.

Lots of headwinds, not enough catalysts

Nokia's stock seems cheap at 16 times forward earnings, but it will likely continue to trade at a discount as it navigates the near-term headwinds.

Nokia still faces tough competition in the 5G market, unpredictable currency headwinds, and the global chip shortage, which could impact its sales of new networking equipment in the second half of the year. It's also being led by a new CEO who only took the helm last August.

Ericsson is still a better buy

Ericsson faces similar challenges, but it's generating stronger growth, with a forward P/E ratio of 16. Ericsson also still pays its dividend and isn't being led by a new CEO.

Therefore, many investors will likely stick with Ericsson instead of waiting for Nokia to possibly achieve its 2023 goals. It will likely take many more quarters for Nokia's green shoots to appear, so investors shouldn't consider its recent earnings beat to be an inflection point yet.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.