Why Nokia could be bought (NYSE: NOK)

For longtime readers who follow this author, choose Nokia (NOK) is not without disappointments. Value investing involves finding rundown, unfavorable stocks with positive catalysts pending to propel them higher. With Nokia, the markets are slowly realizing the multi-year sales potential of 5G.

Opportunistic companies bigger than Nokia may also find ways to unlock the company’s value. Before complying with the US national security policy, governments prepare the communications infrastructure. In addition to being able to get bought out, there are several reasons investors should keep accumulating Nokia stock.

1) 5G contracts

The Department of Defense awarded several companies with contracts valued at $ 600 million. The company is hiring companies to test their 5G communications technology at five military locations. Nokia is one of many companies involved in the “5G strategy”. This plan includes 5G technologies in warfighters.

Last week on October 15th, Fierce Wireless reported that Nokia will be using it Qualcomms (QCOM) 5G RAN platform. This will encourage small indoor cells that cover home and small business locations. Nokia’s 5G Smart Node will deploy a Qualcomm FSM100xx modem in the first quarter of 2021 next year.

Previously, Verizon (VZ) famous award Samsung (SSNLF) 5G contracts that weighed on Nokia stock. Verizon will deploy 5G mmWave sites with Samsung and Samsung Corning (GLW). However, Nokia has better price and 5G deployment. For example, operators can “simultaneously meet the requirements for 5G network densification and indoor coverage”.

When the Federal Communications Commission auctions their C-band spectrum on December 8th, telecommunications providers can bid for the 280 megahertz with a frequency of 3.7 to 3.98 GHz (5 G).

Overall, the events listed above include compliance with US national security guidelines. The growing tensions between the US and China (and to a lesser extent the rest of the world) will increase the importance of politics in the coming years.

2) Relative undervaluation

With a close of trading of $ 4.20, Nokia is valued at $ 23.5 billion by market capitalization. Ericsson (ERIC) is valued at $ 36.95 billion. And although it pays a dividend with a yield of 1.46%, Nokia posted strong positive operating cash flow in the most recent quarter. This will be the case again this quarter. This suggests that the company will reinstate its dividend at the earliest opportunity.

Below you can see that Nokia scores higher than Ericsson in terms of value and profitability:

Those: SA Premium

I previously wrote that Ericsson is a better stock than Nokia (link for premium subscribers or DIY members). This opinion does not change. In this regard, Nokia has better quant factor scores, which suggest that an applicant is realizing their undervaluation.

Bottom: Market capitalization comparison over the past decade

3) More 5G contract wins

Nokia has lost 20% of its value since August 2020 when Samsung won a 5G supply deal with Verizon. However, the markets failed to realize that Nokia has continued to win large orders since then. It will provide the communications solution for NASA’s space mission to the moon. The contract is worth $ 14.1 million. This is the first cellular network on the moon. The win confirms Nokia’s outstanding performance in terms of LTE / 4G reliability and high data rates. In addition, the solution is inexpensive and consumes little electricity.

On September 29th, Nokia signed a supply agreement BT with 5G RAN. This makes it BT’s largest equipment supplier. Nokia will deliver equipment and services to BT’s radio sites. And while it will likely have low hardware margins due to the contract size, the 5G-based services and tech support should increase its profits.

Risks

Nokia doesn’t have a consistent record to beat analyst estimates. The company has exceeded expectations in half over the past six quarters. Earnings per share were missed in two cases:

Data courtesy of Stock Rover

Seasonality also affects Nokia stocks for the next two months and the first half of 2021:

Nokia fell sharply over the summer instead of rising as expected (following seasonal patterns). The contrarian may view the pattern as a bullish opportunity to buy the stock.

Your snack

An American company looking to use 5G can buy Nokia for around $ 9.00. In a 5-year, reduced growth exit model, use the following metrics:

Model courtesy of Finbox

Assuming that the maximum EBITDA in fiscal year 2022 is predominantly 5G:

In the near future, Nokia stock could continue to bounce off the $ 4.00 support line ahead of earnings reporting. If the company, under new CEO Pekka Lundmark, makes profits that exceed expectations, Nokia will finally rise and stay there.

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Disclosure: I am / we are NOK for a long time. I wrote this article myself and it expresses my own opinion. I don’t get any compensation for this (except from Seeking Alpha). I do not have a business relationship with any company whose stocks are mentioned in this article.