Title: Should You Invest in Nokia Stock? A Comprehensive Analysis
Nokia's shares (NYSE: NOK) have been on a roll since the start of 2024, soaring approximately 37% (as of January 14) compared to the S&P 500's 22% increase over the same time frame. Its competitor, Ericsson's shares (NASDAQ: ERIC), have also performed well, climbing 36% during the same period. So, what's the deal with this tech tandem?
Delving into Nokia's third-quarter results, we find an 8% year-over-year (y-o-y) dip in net sales to €4.3 billion ($4.7 billion), but this slide was somewhat cushioned by a 22% increase in net income to €358 million ($389 million). On a per-share basis, earnings rested at €0.06 ($0.07) per share. The company's improved gross margin and proactive cost management initiatives have been instrumental in mitigating the impact of slower sales recovery. Nokia's sales mix has seen a notable shift recently, influenced primarily by evolving regional dynamics. Specifically, there's been a decline in sales to the US market, as American customers work through accumulated 5G equipment inventory from the previous year. Conversely, Nokia has experienced a substantial increase in sales to India, propelled by the rapid pace of 5G deployments in the country.
In terms of long-term performance, Nokia's stock returns have not been the picture of consistency, displaying higher volatility than the S&P 500. In 2021, the stock posted a strong 59% return, followed by a 24% decrease in 2022, and then another 24% drop in 2023. However, it recovered in 2024, posting a 34% return. In contrast, the Trefis "High Quality Portfolio," composed of 30 stocks, has demonstrated less volatility, generating consistently solid returns and comfortably outperforming the S&P 500 over the last 4-year period.
Looking ahead to 2024, Nokia has forecasted an operating profit range of €2.3 billion to €2.9 billion ($2.5 billion to $3.2 billion). Additionally, the company anticipates full-year free cash flow to represent 30% to 60% of operating profit.
As for whether Nokia stock is worth considering at its current level of about $4.51 per share, even though growth may be hard to come by this year, several factors sway in its favor. Nokia's valuation seems reasonable, priced at around 11x consensus 2025 earnings. This is lower than Ericsson, which trades at about 15x forward earnings. Moreover, Nokia might be better suited to manage potential slowdowns in wireless infrastructure spending, considering its involvement in the fixed-line sector. The company has seen an increase in demand for areas like optical networks, IP networks, and submarine networks in the last year.
Enrichment Insights:
- Nokia's Outperformance: While both Nokia and Ericsson have outperformed the S&P 500 in 2024, Ericsson has especially excelled. Factors contributing to Ericsson's success include:
- Strong Q3 and Q4 Results: Sales grew significantly, with strong gross margin expansion, and IPR revenues set to exceed SEK 13 billion in 2024.
- Operational Excellence and Strategic Initiatives: Ericsson remains a leader in programmable networks and has secured strategic joint ventures for financial resilience.
- Free Cash Flow Generation: The company generated strong free cash flow, boosted by earnings growth and improved working capital management.
- Net Cash Position: Ericsson's net cash position increased substantially in 2024, demonstrating robust financial health.
For a deeper analysis on Ericsson's performance, see the Ericsson Valuation article.
Nokia's revenue from Nokia's own operations, known as Nokia revenue, showed a 8% year-over-year dip in the third quarter of 2023, despite a 22% increase in net income. The company's stock, trading under the symbol NOK on NYSE, has seen a significant rise of approximately 37% since the beginning of 2024.