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How Nokia Is Benefiting from Strong 5G Demand

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Shares of leading telecom (telecommunications) equipment company Nokia (NOK) are up 8.0% so far on July 25. The stock is currently trading at $5.59. Nokia posted better-than-expected earnings in the second quarter, which drove its stock price higher. Nokia’s adjusted EPS were 0.05 euros in the second quarter, 67.0% higher than analysts’ estimate of 0.03 euros.

Nokia’s revenue also beat estimates. The company posted revenue of 5.69 billion euros ($6.34 billion), higher than Wall Street’s estimate of $6.04 billion. Its earnings and revenue beat are driving its stock up. Despite the recent rally, Nokia shares are still down 3.7% year-to-date.

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What affected Nokia’s revenue in the second quarter?

During Nokia’s earnings call, CEO Rajeev Suri accepted that demand in the first half had been weak. Management expects customer demand to rise significantly by the fourth quarter driven by 5G deals.

Nokia has already experienced solid 5G demand from developed markets in the US and South Korea. It also expects to gain traction in international markets, including Japan, Nordic countries, the Middle East, Italy, China, and the United Kingdom.

Nokia claims to have closed 45 commercial 5G deals to date. However, competition from peers—primarily Ericsson (ERIC)—will keep Nokia on its toes. Nokia, Ericsson, and China’s Huawei are the top players in the networking equipment space and are battling it out to gain new 5G deals.

Ericsson stock is down 7.0% this month. It warned investors that growing competition would affect its bottom line in the next two quarters. Nokia and Ericsson could benefit from the Huawei ban imposed by the US government. Huawei led the telecom equipment market at the end of 2018, but given its growing security concerns, Nokia and Ericsson may bag more 5G contracts instead.

What’s expected from Nokia in 2019?

Trade war uncertainty is likely to affect Nokia’s revenue in the coming quarters. To offset this impact, Nokia has targeted cost savings of 700 million euros and spending reductions. The shift to 5G remains critical, as telecom spending slowed at an alarming rate after the 4G rollout a few years back.

Suri stated, “Risks remain in the year, including execution demands in the second half, trade-related uncertainty and challenges in the China market. Given these risks, we will continue to focus on tight operational discipline, delivering on our EUR 700 million cost-savings program, improving working capital management and advancing the implementation of our strategy.”

Analysts expect Nokia’s EPS to be flat this year at $0.27 and then rise 48.0% to $0.40 in 2020. Analysts expect Nokia’s earnings to rise 18.7% annually in the next five years. While Nokia’s revenue could fall 2.5% in 2019, it’s expected to grow 3.3% in 2021 to $26.76 billion.

Nokia stock is trading at a forward PE multiple of 13.9x. The stock looks undervalued by at least 25.0% considering its five-year earnings growth. Wall Street analysts have a 12-month price target of $6.73 for Nokia, indicating an upside potential of 20.8% from its current price.

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