NFLX - Nokia Q3 Earnings Review: Still No Catalysts

2023-10-19 15:30:57 ET

Summary

• Nokia announced weak Q3 2023 results, sending NOK stock to multi-year lows.
• The telecom equipment company plans 14,000 job cuts as it struggles to find a catalyst for growth despite strong data traffic growth.
• Nokia stock isn't expensive trading at ~8x EPS targets, but any rally should be sold.

Several years after last covering Nokia Oyj ( NOK ), the stock has only fallen in an up market. The telecom equipment company just announced another 14,000 job cuts after weak Q3 results in a clear signal the business still lacks a major catalyst for growth. My investment thesis remains Neutral on the stock of the European telecom company.

Nokia Q3 Earnings - The Drip Continues

Nokia continues to face a tough market as telecom spending remains mostly flat to down, with customers struggling to justify higher spending. The company reported a small profit of €0.05, with revenue of €4.98B down -19.7% YoY.

As with a lot of telecoms and network equipment companies, the Covid boost in telecom demand didn't lead to additional revenues for Nokia. The company actually saw India revenue more than double, yet revenues dipped €1.2 billion over last Q3.

Consumer wallet share is increasingly going towards more expensive smartphones, not paying more for wireless network access to telecom players like Verizon Communications ( VZ ). At the same time, consumers are consuming far more network bandwidth via video streaming, yet the sales are flowing to the likes of Netflix ( NFLX ) via a 15% hike in subscription prices, not to telecom operators providing the 5G wireless or telecom infrastructure to stream those shows.

On the Q3'23 earnings call , CEO Pekka Lundmark highlighted the issue driving lower spending on 5G:

...a key reason why operators have been hesitant with their investments has been that that their 5G monetization has been slower than expected. And the reason for that has been that it has been difficult for them to introduce new applications that would take advantage of the capabilities of 5G.

The company spent a lot of time talking about higher data traffic from cloud computing and AI, but sales remain depressed to the point that Nokia plans to cut 14,000 jobs. The company is targeting between €800M to €1.2B in cost savings by 2026.

On the Q3'23 earnings call, CEO discussed what would normally be a promising market backdrop (emphasis added):

Data traffic is expected to continue to grow 20% to 30% per year . And actually, the big picture is pretty simple. I mean, the whole world is talking about cloud computing and AI evolutions and there are huge expectations from both. But neither of the two cloud computing or AI evolutions will materialize without significant investments in networks that have vastly improved capabilities.

Nokia fails to highlight any scenario where sales grow to match the growth in data traffic. The company wouldn't need to cut €1.0 billion in annual costs, if substantial sales growth was part of the picture.

The company should see a slight rebound in revenue when the macro picture improves.

Depressed Level

The stock has fallen to Covid lows at only $3 now. Nokia has a limited market valuation in the $19 billion range.

The company remains on pace for annual EPS in the $0.40 range. Clearly, the stock isn't expensive here, and Nokia regularly rallies with the cycles in the stock market, such as with a 2019 jump to $6 and a post-Covid rally back to $6.

The long-term problem is the lack of any catalysts for customers to spend substantially more on telecom network infrastructure with 5G networks built out and North American wireless carriers pulling back on capital spending. Nokia is far too reliant on customers with substantial debt loads in Western Europe and the U.S. with no path to spending more on capex due to the inability to monetize higher data traffic demand.

Nokia cutting expenses will help keep profits up, but the company needs earnings growth from a boost in sales to drive a sustainable rally in the stock. The company provides no indication the surge in data traffic from AI will lead to any higher sales for the telecom company.

Takeaway

The key investor takeaway is that Nokia investors probably don't want to dump the stock at the multi-year lows here, but Nokia should be sold on any rallies. The telecom company has no catalysts for sustainable sales growth.

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