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Investing, Stocks  | September 23, 2020

Last month, Nokia (NYSE:NOK) looked like it was set to break out above the $5 level. That assumption proved wrong. Nokia plunged by around 20% in September when Verizon Communications (NYSE:VZ) selected Samsung to supply its 5G equipment. Investors lost confidence in Nokia’s turnaround plan. Now, despite winning numerous 5G supply deals worldwide, Nokia risks falling below its 200-day simple moving average at just below $4.

What will it take for investors to aggressively accumulate shares in the coming weeks?

Nokia Stock Benefits From Contract Wins

On Sept. 15, Nokia said that Viavi Solutions (NASDAQ:VIAV) will validate its coherent optical modules. Nokia’s Head of Engineering, Andreas Leven, said, “[c]arriers worldwide are investing in optical transport upgrades as they prepare for next-generation communications.” By fortifying its reputation for reliability, other customers besides Verizon will consider increasing 5G hardware orders with Nokia instead.

Viavi is on the path to offering the first coherent test solution. This will support the multiservice market at 400G. So, customers will have high-speed network tests. The test also ensures the interoperability of network equipment, which ultimately lowers operating and maintenance costs.

On Sept. 14, Dish Network (NASDAQ:DISH), a U.S. satellite TV provider, picked Nokia to supply 5G core software. Dish is building a network from the ground up. It is employing Open Radio Access Network. This uses software to manage network functionality on the cloud. By relying less on physical hardware, Dish should have fewer operational issues.

Open RAN Leader

Nokia’s investment in Open RAN solutions offers customers the best network security, performance and cost-efficiency. Nokia describes Open RAN as Open RAN defining “open interfaces between network elements, while Cloud RAN virtualizes baseband and targets the separation of baseband hardware and software.” For example, its AirScale Cloud RAN virtualizes the 5G central and distributed unit. This puts it ahead of the competition.

As the first major vendor to join the O-RAN Alliance, it is embracing open standards and the Linux Foundation’s ONAP initiative. The Linux environment is known for its reliability and robustness. As more customers buy Nokia solutions, Nokia’s reputation as a 5G network supplier should improve. This will lead to higher revenue and sustained gross margins in the quarters ahead.

On a Deutsche Bank Virtual Technology conference, Nokia’s Chief Digital Officer, Bhaskar Gorti, re-affirmed the importance of O-RAN. By supporting it, Nokia expects an acceleration for better economics. Once Dish benefits from its installation, Nokia will likely win business from the competition.

Price Target

On Wall Street, four of the seven analysts rate the stock as a “hold.” The average price target is $5.25 (per Tipranks), which would imply an upside of 28%. Realistically, until Nokia posts another quarter of exceptional growth and higher gross margins, the stock may trade in the $4 to $5 range in the near-term.

Traders may want to buy Nokia at current levels and wait for it to bounce back to $5. At a forward price-to-earnings ratio of 12.25 times (and a 31x P/E), investors are excessively discounting Nokia’s strong future.

Nokia is still an out of favor value play. Whenever it posts good news, the stock either slumps or investors do not react. Any bad news will give bears a chance to attack the stock.

As such, the company’s management team needs to make promises that it can actually deliver on instead of disappointing investors. If it exceeds guidance, that will strengthen shareholder confidence.

Your Takeaway

Using its discounted cash flow, analysist at Stock Rover determined the stock’s intrinsic value at around $6.

Nokia scores well on value and growth. However, its quality, based on such measures as net margin, gross margin and return on invested capital, scores below 60/100. Management indicated higher profitability ahead, which will lift this stock.

Investors should consider accumulating shares of Nokia while it trades at a discount.


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