NOK Stock is Buy It Now, but Nokia’s network activity is questionable
Nokia (NYSE:NOK) is, as many have speculated, on its way to reasserting itself as a well-regarded name in technology, mobile networks, infrastructure and cloud services. The fate of the company’s resurgence will be determined by its 5G performance.
Stocks have been relatively strong since Nokia reported strong results at the end of April. The Finnish company’s results make NOK’s stock a worthwhile investment, as the company’s recent success appears to be the start of a longer-term turnaround. However, there is one question about Nokia that savvy investors should consider moving forward.
Nokia is in the midst of a turnaround
The tech company has succeeded in increase net sales by a modest 3% in the first quarter compared to the same period a year earlier. This figure was well above 9%, excluding currency fluctuations.
The important aspect of the first quarter results, however, was that Nokia generated a profit after suffering a loss in the first quarter of 2020. Its operating profit in the first quarter was 431 million euros, compared with an operating loss of 76 million euros over the same period a year earlier. .
The reversal can be attributed in large part to the leadership of Pekka Lundmark, who became CEO of Nokia in March 2020.
Nokia reduced its expenses, increased its operating margins and, as a result, became profitable, its first quarter net income amounting to 263 million euros.
Nokia management remains conservative in some ways. The company reported a 15.3% return on invested capital in the first quarter of this year, up 3.8 percentage points year-over-year.
Nokia expects its 2021 ROIC to be between 10% and 15%, even though the figure was 15.3% in the first quarter. However, he says he only expects his ROIC to be between 15% and 20% in 2023. As a result, I think his forecast for ROIC 2021 may have been intentionally conservative.
A problematic business
Although Nokia is heading in the right direction, as its first quarter results show, it still has some worrisome issues.
One of the main issues for the company concerns its Mobile Networks business. The extent to which the unit can compete with its peers is not yet clear. Indeed, the company said: “The competitive intensity, which particularly impacts mobile networks and is expected to remain at a high level in 2021, as some competitors seek to take part in the early stages of 5G.
Q1 performance of the mobile network (page 9) was mixed up. Its sales fell 4%, year-on-year to 2.26 billion euros. So it seems that competition has hurt the unit. However, the unit’s operational efficiency improved in the last quarter, allowing it to post a profit in the first quarter, compared to a loss in the same period a year earlier.
Mobile networks are one of the main pillars of Nokia’s business. The unit relies on Nokia’s 5G ReefShark chip, which accounted for 44% of its first quarter shipments. The chip is what is called a System on chip (SOC). It is essentially a computer on a chip.
The SOC ReefShark, which Nokia uses for its 5G gear, is in many ways superior to the previous chip it used. But the decline in Mobile Network revenue does not bode well for Nokia’s 5G hopes.
Nokia’s Network Infrastructure business, on the other hand, was strong across the board, with sales of each of its four types of network infrastructure – IP, optical, fixed and submarine – all increasing. Overall, unit sales increased 22% year-on-year.
So while Nokia’s Network Infrastructure business was very strong, its Mobile Network business was weaker in the first quarter than a year earlier. These two companies together represent 79% of Nokia’s revenues. The fact that sales of the larger unit have declined will raise eyebrows in the future.
I think NOK stock is worth buying right now as the business has become more efficient and profitable. However, Nokia must prove that its Mobile Networks unit can compete with its peers or investors will continue to be reluctant to buy NOK shares. After all, 5G is the number one reason investors care about Nokia, even though its stocks remain cheap.
At the time of publication, Alex Sirois had (neither directly nor indirectly) positions in the securities mentioned in this article. The opinions expressed in this article are those of the author, submitted to InvestorPlace.com Publication guidelines.