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  1. Home
  2. / Investing

Here's Why I'm Bullish on Nokia Over the Coming Year

One big reason centers on the upcoming deployments of 5G networks.
By CHRIS VERSACE
Feb 07, 2019 | 02:31 PM EST
Stocks quotes in this article: NOK, ERIC, T, VZ, TMUS, VOD

Since reporting its December quarter results last week, shares of mobile infrastructure and IP licensing company Nokia (NOK) have fallen from a high of $6.57 following competitor Ericsson's (ERIC) quarterly results to the current share price just below $6.00. Despite that near 10% drop in the shares, there are several reasons to be bullish on NOK shares over the coming year, so much so that just over a month ago I named them as one of my top 8 picks for 2019.

Why? Well for several reasons.

The first centers on the upcoming deployments of 5G networks by the likes of AT&T (T) , Verizon (VZ) , and T-Mobile USA (TMUS) here in the U.S., but also around the globe over the coming few years. According to findings at the GSM Association (GSMA), the leading trade group among the world's 750 mobile operators, a number of mobile 5G commercial launches are expected over the next three years in North America, Asia and Europe. By 2025 China, the US and Japan will be the leading countries by 5G connections and factoring in Europe, those four economies will account for more than 70% of the 1.2 billion 5G connections expected globally by the end of 2025.

As anyone who has used a mobile phone or smartphone knows, in order to have those connections, the corresponding networks need to be deployed and lit by the operators. This drives demand for mobile infrastructure equipment. That market has historically been a cyclical one, with upswings in demand dependent on new technology deployments such as 3G, 4G and now 5G.

As that 5G ramp grows both in and outside of the U.S. over the coming quarters, it means we should see quarter over quarter improvement in Nokia's revenue and profits. This will likely be rather obvious when, in hindsight, we compare its second half of 2019 results with the first half of the year. Underscoring that outlook, Nokia issued favorable margin guidance for 2020 in the range of 12%-16% vs. 9%-12% this year and 9.7% for all of 2018. This improvement reflects not only operating leverage associated with the growing networks business, but also the monetization of the company's 5G patent portfolio across smartphones and other devices.

That brings us to the second reason why for Nokia shares - its IP licensing business. To date its licensing customer have included mobile phone and smartphone companies, but with 5G we will see the market for cellular connectivity move past these devices into Internet of Things (IoT), connected Car and Home applications as well as wearables. In short, we will see a meaningful expansion of the target market for Nokia's patent portfolio. And with operating margins in the range of 70%-80% over the last two years, each incremental licensing deal is meaningful to Nokia's bottom line.

The third reason is the changing competitive landscape that is increasingly favorable for Nokia's 5G equipment prospects as more countries question the role of Chinese competitor Huawei in their mobile networks. Last year, President Trump signed a bill banning government use of Huawei's equipment as part of the Defense Authorization Act. One of the issues behind that decision was summed up in a recent New York Times article:

"American and British officials had already grown concerned about Huawei's abilities after cybersecurity experts, combing through the company's source code to look for back doors, determined that Huawei could remotely access and control some networks from the company's Shenzhen headquarters."

The above also explains the recent decision by Vodafone (VOD) to halt buying Huawei gear; BT Group, the British telecom giant, to rip out part of Huawei's existing network; and France's Orange mobile operator to not use Huawei equipment in its core 5G network. Last year, Australia banned the use of equipment from Huawei and ZTE, another Chinese supplier of mobile infrastructure and smartphones.

From my perspective, this raises many questions when it comes to Huawei. As companies look to bring 5G networks to market, they are not inclined to wait for answers when other suppliers of 5G equipment stand at the ready, including Nokia. The exclusion of Huawei and ZTE also could lead to firmer pricing and better margins in the 5G upcycle than is currently anticipated by the investment community.

While we wait for the next round of China-US trade negotiations and what they may or may not mean for 5G and Huawei, the next known catalyst for 5G and Nokia shares will be THE mobile conference of the year, Mobile World Congress that will be held Feb. 25-28 in Barcelona, Spain. Historically this has been the showcase for new mobile devices and network technology announcements. Odds are we will see a number of new 5G smartphone announcements, some of which will join models from Samsung, Motorola Mobility and others in hitting shelves in the US this summer as AT&T, Verizon and others light up their commercial 5G networks. That's a great start, but it's only the beginning.

Nokia is a holding in TheStreet's Stocks Under $10 portfolio. Click here to learn more about this portfolio, trading ideas and market commentary product.

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Nokia is a holding in TheStreet's Stocks Under $10 portfolio. Click here to learn more about this portfolio, trading ideas and market commentary product.

TAGS: Investing | Stock of the Day

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