TMF Herve Blandin | Mar 22, 2021 at 12:00PM
During its capital market day on March 18, Nokia's (NYSE:NOK) management updated its long-term plan and outlook. So following several disappointing quarterly results and an expected revenue decline in 2021, will the telecom vendor finally thrive over the next five years?
Challenges in 5G
Having started as a single paper mill operation in 1865, Nokia has faced many transitions in its 156-year existence. More recently, after a disappointing performance in its 5G business over the last several quarters, the company needed extra adjustments.
Following its 15.6 billion euros ($18.6 billion) acquisition of the telecommunications equipment outfit Alcatel-Lucent in 2016, it spent significant resources to integrate both entities. During that time frame, its European rival Ericsson (NASDAQ:ERIC) ramped up its investments to gain market share and scale in the growing and promising 5G market.
As a result, Nokia has been struggling to remain competitive with its 5G offering. It estimated its 4G and 5G mobile radio market share stabilized to 27% to 28% at the end of last year, compared to 27% one year ago. But that excludes China, where the company lost market share, as it didn't manage to fully replace its 4G footprint with 5G because of its weaker 5G portfolio.
Thus, new CEO Pekka Lundmark announced in October a new strategy to address the company's issues and improve results. Instead of proposing end-to-end monolithic solutions, Nokia will be prioritizing best-of-breed offerings in the 5G and network areas.
Modest goals
Management reorganized the company around focused business units. More importantly, it announced cost reductions to fund increasing research and development (R&D) efforts to grow revenue and improve margins thanks to more differentiated and competitive offerings. Yet Nokia's long-term goals remain modest.
Before these initiatives lead to improving results, revenue should decline this year, based on the midpoint of the revenue guidance range of 20.6 billion euros ($24.6 billion) to 21.8 billion euros ($26.0 billion), compared to 21.9 billion euros ($26.1 billion) last year.
Looking ahead, management forecast revenue to grow faster than the company's total addressable market by 2023. But that should still correspond to low-single-digit growth. Since the decline of legacy technologies will partly offset the strong growth of 5G and cloud businesses, the company anticipates its addressable market to grow at a compound annual rate of only 1% by 2023.
Also, management anticipates operating margins to increase from a range of 7% to 10% this year to a range of 10% to 13% by 2023, which pales in comparison to Ericsson's profitability. Thanks to its investments over the last several years in its 5G portfolio, Ericsson's operating margins reached 19% in 2020, and it aims to sustain its margins in the 15% to 17% range.
You should compare these margins with a grain of salt, as both companies don't operate identical businesses (for instance, Nokia developed a network infrastructure portfolio). But the point is, besides areas of strength, Nokia must deliver flawless execution over the next several years to improve its financial results to only low revenue growth and modest operating margins.
Looking forward
The future of Nokia depends on its ability to translate its R&D efforts into differentiated and more competitive solutions in the 5G and network infrastructure areas.
With solid execution, the company should be able to reach its modest goals by focusing on its strengths. But given Ericsson's focus on R&D to sustain its competitive advantage, and with strong competitors, such as Huawei, Samsung, Cisco Systems, and Arista Networks, that have been leading with different 5G and networking infrastructure offerings, I don't see Nokia becoming a disruptive leader in the next five years.
Thus, Nokia's stock seems fairly priced at forward enterprise value-to-sales and price-to-earnings ratios of 0.7 times and 16.6 times, respectively.
Nokia |
.jpg)
