Full Diligence Post on Nokia (NOK) Ahead of Capital Markets Day next Thursday (3/18)

by moneygrabber007

History of Nokia

If you’ve seen any of the recent Nokia posts over the last few months, a common comment you will see is: “Nokia?!? That stock has been trading sideways for years!”

While yes that is true, it is important to understand why. Let’s take a look.

2000-2013

Nokia dominated the mobile phone market during this time due to a quality handset. NOK traded in the $50s during the Dotcom bubble and in $30s before the housing crash. However, they never recovered after 2008 due to struggling to keep up in software as the mobile phone market started to shift to smart phones.

2013-2019

When Nokia realized that trying to stay in the phone space was a losing battle they sold their phone division to Microsoft in 2013. For the next 3 years, Nokia was a large company in disarray.

This did not get much better in 2016 when they acquired Alcatel-Lucent and decided to focus on networks. The merger did not go as smoothly as planned and over the next 5 years Nokia started “trading sideways” due to a bearish sentiment.

Some investors stuck around through all of this due to a dividend being paid out, but that was suspended in 2019 so Nokia could focus on developing its 5G mobile networks. This dropped the share price down to $3.50.

2020-Present

In March 2020, sentiment started to change somewhat bullish as they announced Pekka Lundmark would be taking over as CEO. Pekka worked for Nokia for a decade in the 90s and most notably served as Fortum’s, a Finnish state-owned energy company, CEO from 2015 to 2020.

The bullish sentiment was shorted lived due to the pandemic crash dropping the share price to $2.42. It started to pick back up over the summer when it was announced that Pekka would take over a month earlier than planned.

This was followed by rumors that there was a chance Nokia could win Verizon’s $6 billion 5G deal. Hype around this brought Nokia’s price above $5 for the first time since they suspended their dividend in October 2019. But in September, it was announced that Samsung won the Verizon deal and NOK fell down to $3.78. It fell even further to $3.37 in October when the rest of the market saw a down swing.

Then it climbed back up to the low $4s, had a crazy January hitting $9.79 for about 10 seconds during to the meme stock frenzy, and has since returned to the high $3s low $4s after the Q4 earnings call.

Q4 Earnings Call

So what exactly did happen during that earnings call on 2/4/21? Why did it hurt NOK’s price?

A lot of people blame Pekka messing up the call with some pessimistic word choices, most notably the word “challenging.” Why would he say this?

It may just be his straight forward personality. It might have been an intentional sandbag so he can control future expectations. It may because Nokia prides itself on being on ethical company. I think it was probably due to a little bit of all of the above. Pekka using this language was not surprising. He said the exact same thing during the 2020 Q3 earnings call.

So the rumors that Nokia may blow it out of the water during their Q4 earnings were unwarranted. Nokia did beat their expected earnings, but because of a decrease in year over year revenue, people overreacted (just like they did when Samsung won the Verizon deal) and sold their Nokia positions.

Pekka’s Tenure

Pekka has been in charge for 7 months during a global pandemic, but he has been able to make some progress it appears. Much of this information can be found in the Nokia 2020 Annual Report.

  • He trimmed their employee size by 11,000.
  • He improved their free cash flow to $2.6 billion.
  • Even with the decrease in revenue he nearly doubled their operating profit (page 82).
  • He drastically reduced their net deferred tax balance (page 175).
  • He created four distinct business groups with plans for these groups to be shared in more detail during during Capital Markets Day on 3/18.
  • He replaced Nokia’s CFO, CTO, and CMO (CFO happened before he took over)
  • It appears he issued new shares to leadership.
  • Pekka has a stake in the company (page 67 of annual report) with a long term goal to “Focus on increase in share price and restoration of the dividend”.
    • ” In addition, Mr. Lundmark received an award of EUR 1.3 million of restricted shares on joining to buy out the awards he forfeited on leaving his previous employer. Mr. Lundmark was invited to join the co-investment based long-term incentive arrangement (eLTI) targeted to engage senior leaders with the long-term nature of our business and share price, and purchased EUR 2.6 million of Nokia shares against which he was given a matching award of EUR 5.2 million of Nokia 2020 performance shares. This investment by Mr. Lundmark aligns him with shareholders from the start and is a sign of his commitment and engagement with the company. Delivery of actual Nokia shares would take place in 2023 subject to performance conditions”

Bullish

Here is a list of 28 deals and partnerships Nokia has established since December 2020. Some of these deals are not massive, but they span across 6 continents.

Largescale Network

  • 5 year Multi Billion Dollar T Mobile Deal
  • 7 year Belgium deal
  • Deutsche Telekom in Germany
  • France’s Mainland 5G Network
  • 5G Network in Austria
  • Telecom Italia
  • Cibicom ISP in Denmark
  • Polkomtel Phone Provider in Poland
  • Telenor Group in Thailand
  • Ooredoo in Algeria
  • 5G Network in Philippines
  • Tele2 in Sweden, Latvia, Lithuania, and Estonia
  • Ecuador
  • Vodafone in Australia
  • Saudi Arabia
  • Singapore

Private 5G Deals

  • San Diego Gas & Electric Private Network
  • Port of Seattle
  • Japanese Companies Conexio, Hitachi Kokusai, Nippon Steel, Omron and Sharp
  • WEG Motor Manufacturer in Brazil
  • Elisa in Finland
  • Optus Stadium in Australia

Partnerships

  • Google Cloud
  • EU’s Hexa-X 6G Project
  • Brazil’s Telecommunications R&D Center
  • AT&T tests to deploy virtualized and open RAN
  • Patents deal with Samsung
  • LG Uplus trial in South Korea

5G is the Future

The confusing nature of 5G could be holding back the market’s valuation of Nokia.

  • Nokia is currently trading at a market cap of $22-23 billion even with a 2020 revenue of $24 billion.
  • A letter that Pekka recently published gives a decent explanation of what 5G is.
    • In it, he admits “[5G] is exciting, but it can seem a bit abstract.” But then goes on to describe some real world examples that really helps explain it.
    • “Our partners saw unanticipated breakdowns and production line defects drop by 30% after installing smart video sensors in our manufacturing deployments. In the logistics sector, deploying augmented reality devices cut machine monitoring costs by half. In ports, remote-controlled cranes doubled productivity and eliminated staff injuries: an incredible 100% drop.”
  • This seems to suggest that there may be more uses for 5G worldwide than cellular networks.
  • Nokia released a study stating that 5G could have an $8 trillion impact on global GDP by 2030.
  • Nokia and Ericcson may have a duopoly on 5G with Huawei and ZTE being banned in many countries. This trend may continue.
  • Some analysts have predicted massive (>1,000%) growth in the 5G market over the next 5 years.

Upcoming Events/Rumors

  • Capital Markets Day (3/18/21)
    • This is when we will get some true guidance on the future of the company. Not only will they lay out the strategic business plans for their 4 business segments as I mentioned above, but it should be when they make announcements toward potential a Dividend Reinstatement, Share Buyback, and future R&D decisions.
  • Annual General Meeting (4/8/21)
    • Not sure what they plan to cover during this, but I would assume it will act as a follow up to Capital Markets Day
  • Dividend Reinstatement
    • Most signs point to Nokia investing in R&D for a while, but based on Pekka’s compensation package it should be back by 2023 at the latest.
  • Share Buyback
    • Nokia did buy back 1.25 billion shares in 2015-16 and 1 billion shares in 2016-17. So the rumors they plan to do this again could be true. They can purchase up to a total of 550 million shares both this year and next year. 550 million because it correlates to 10% of the companies total outstanding shares.

Bearish (Risks/Cons)

  • The meme stock frenzy has a long-lasting impact on the opinion of this stock.
  • The dividend is not reinstated for another 3+ years.
  • Pekka does not have what it takes. Nokia is a sinking ship and cannot be turned around.
  • FCF is used solely for R&D and no shares are bought back over the next three years. The float does turn out to be too big to move significantly.
  • Nokia may not be undervalued and their revenue streams may continue to decline due to network share loses and pricing erosion.
  • Pekka has been very serious over the last two earning calls and things are going to get much worse/challenging before they get better.
  • With a new US administration in place, the trend of banning Huawei and ZTE that they started is lifted. These two competitors then undercut Nokia pricing.
  • 5G is no where near as big of an industry as the experts predict. Covid continues to slow the rollout of 5G well past 2030.
  • 5G is too confusing and never gets the buy in from today’s investors.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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