NOKBF - Nokia: Watch For 2024 Recovery

2023-09-19 17:06:20 ET

Summary

• Nokia Oyj's stock has declined by over 30% from pandemic highs, with decreased investor interest and challenges in achieving revenue growth.
• The outlook for 2024 appears promising, with potential growth drivers such as increased demand for AI-focused infrastructure networks, U.S. government programs, and expansion in India.
• Nokia has a decent financial position, low valuation, and a steady margin growth, reducing risks and indicating its ability to weather market fluctuations.
• The stock might become attractive for investment once we see signs confirming the recovery.

Nokia Oyj ( NOK ), a telecommunications giant, has seen its stock decline by over 30% from pandemic highs, largely flying under the radar in recent years. There has been little catalyst for the company, and Nokia's network markets grappled with an inventory surplus, resulting in a temporary slowdown. However, the outlook for 2024 appears promising, with projected normalization in network infrastructure spending and a shift in the company's focus towards growth. Nokia's track record of profitability over the past few years, coupled with these positive developments, may position it for renewed momentum in the tech sector.

Nokia has fallen under the radar in the recent years, with oversaturation in its clients' inventory

Nokia's stock has experienced a decline of over 30% from its pandemic-era highs, reflecting a period of subdued performance for the company. Additionally, the level of investor interest in Nokia has waned, particularly in comparison to the heightened attention and hype during the "meme stock" frenzy .

This decline in stock value and diminished investor enthusiasm may be attributed to various factors affecting the company's financial performance and market sentiment.

In the recent conference call , Nokia highlighted several headwinds for its revenue. The company noted that the economic environment had begun to impact customer spending, particularly in network infrastructure, leading to declining sales across all subsegments except Optical Networks.

Another significant factor affecting Nokia's performance was the oversaturation of inventory among its clients in 2022, resulting in inventory digestion, particularly in the consumer premise ONT devices. During the recent Goldman Sachs ( GS ) technology conference , the company noted a particular pattern in which its clients "bought more than they built" in 2022.

Nokia also acknowledged other short-term challenges impacting the business, including a softening environment for Communication Service Provider ((CSP)) spending. Notably, in North America, the drop in net sales in IP networks amounted to approximately 11%, primarily driven by market weakness.

In summary, Nokia faced challenges in achieving revenue growth, attributed to macroeconomic factors, inventory oversaturation, and a softening CSP spending environment. As a result, the company's performance has not been particularly exciting in the recent years, and there has been no catalyst for the stock.

Nokia's outlook for 2024 appears promising, with several growth drivers ahead

Despite the challenges above, Nokia expects a steady increase in demand in 2024 as its clients process their inventory, potentially driving momentum for the company.

And as we all know, that industry is in a way cyclical. But the good thing is that, for us is that, we are gaining share in a market that is structurally a little bit weak at the moment, but we are strengthening our relative position there. And ultimately, it is a question of timing that when they will have to start spending again, because the data traffic keeps on growing 20% to 30% per year. And if they want to stay competitive, eventually, they will have to start investing again.

Nokia's growth prospects for 2024 hinge significantly on the speed at which network build-out occurs. During the aforementioned technology conference, Nokia's CEO mentioned that the forecasts for the North American wireless infrastructure market indicate a potential resurgence, with the possibility of a 14% growth rate in the upcoming year. As the world increasingly becomes a "decentralized computer with a growing emphasis on AI," the role of networks, including wireless and data center interconnectivity, is expected to drive demand for Nokia's solutions.

Additionally, the growth narrative in India is pivotal for Nokia. Last year, the company secured a significant position in Reliance Jio's 5G network, which is the world's largest mobile network outside of China. The growth trajectory in India indicates significant potential, as Nokia's revenue in the country went up by about 355% in the latest quarter. Even though this trend is not likely to be sustainable, this growth helps offset any weaknesses in the North American market.

At the same time, as the United States aims to provide 1-gigabit service to every citizen, Nokia is well-positioned to benefit from government spending programs, such as the BEAD initiative , which is part of the Buy America program. This funding, amounting to approximately $42.5 billion, presents a significant addressable market for Nokia, with the company currently holding a 60% market share in the U.S. for broadband applications, according to Nokia's CEO.

These potential developments, combined with an increase in Nokia's market share in key network markets and the projected return of demand, could become significant catalysts for the company's revenue in the upcoming year. Therefore, there is a high chance the company will exceed modest revenue estimates in the next years, which can finally create a catalyst for the stock.

Nokia has a decent financial position and low valuation, reducing the risks to the minimum

Nokia's financial management appears prudent and reduces the risks for investors. Despite the challenging environment, Nokia achieved flat year-on-year sales in Q2 2023 (in constant currency), primarily thanks to market share growth. Nokia's strategies also include maintaining cost discipline to adapt to market conditions and accelerate cost reduction programs as needed to ensure resilience in the face of fluctuating market demand.

Hence, Nokia has maintained a steady TTM margin growth over the last years, despite the weakness in the markets and an increase in clients' inventory, which usually hinders pricing power.

Importantly, Nokia also continued to generate positive earnings, indicating its ability to weather market fluctuations while focusing on its long-term growth strategies. And since the company is able to manage its costs quite effectively irrespective of market demand, any catalyst for revenue growth can lead to a substantial increase in profit. Besides, with about EUR 3.7 billion ($3.96 billion) in net cash position, Nokia's future appears secure at the moment.

When it comes to valuation, NOK looks to be valued very conservatively, marked by a P/S ratio of about 0.8 and a 2024 P/E ratio hovering around 8 . Such valuations appear surprisingly modest, particularly within the context of the technology sector where companies often command higher multiples. This is particularly intriguing given Nokia's pivotal role in potentially underpinning the infrastructure of emerging AI networks, which are widely anticipated to be central to the future of technology. Additionally, Nokia's valuation is noticeably lower than that of its closest competitors, such as Ericsson ( ERIC ), suggesting a potential market undervaluation.

Notably, the conclusion is supported by Seeking Alpha quant rating, which rates NOK very high on valuation, growth, and profitability.

Key takeaways

In summary, Nokia has faced several challenges over the recent years, with its stock declining by over 30% from pandemic-era highs and decreased investor interest. Factors include softening CSP spending, inventory oversaturation in 2022, and reduced demand in North America.

However, Nokia's 2024 outlook appears positive, with expectations of normalized client spending patterns after the 2022 inventory oversaturation and several potential growth drivers, such as increased demand for AI-focused infrastructure networks and expansion in India. As the company continues to increase its market share in key segments and maintain stable operating margins, a revenue tailwind should lead to a significant increase in the company's profits. This could create a solid catalyst for the stock, especially in light of extremely modest market assumptions. Therefore, if the recovery indeed comes in 2024 as Nokia projects, the stock might become a solid investment target.

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