We are launching coverage of Nokia and estimate the fair value of the company’s shares at 7 euros. We like the company’s business and note that the company is struggling to achieve improved operating margins, even though Nokia has to closely control operating costs due to the overall level of its investment program and to withstand high levels of market competition. We see an increase in market competition and, as a result, an increase in price pressure, which should negatively affect Nokia’s gross profit. We expect a moderate decline in the company’s revenue by the end of 2021 and a modest growth of the indicator in the long term at a level below the general market level. We also see only marginal improvement in operating margin over the long term. Nevertheless, we are encouraged by the management plan to solve all the current problems in the mobile segment. Most importantly, we like the current valuation of the company’s stock in terms of risk / reward.
Nokia could gain US market share in wireless, optical and IP router segments. Nokia competes with Huawei in all three segments, but may gain a greater advantage in the wireless segment. Huawei has been a tough competitor to Nokia as the Chinese manufacturer has established a solid market position in the relatively inexpensive, feature-rich base station segment over the years. Nokia is on track for sustained business growth and increased profitability as the 5G market gains momentum, helping the company move beyond some of the short-term software issues. Over the long term, we expect revenue growth from the sale of 5G equipment, as well as a stabilization of the software development business, which will lead to more predictable revenue growth and increased margins.
Nokia Corporation is a leading supplier of communication equipment and intellectual property to companies around the world. The company comprises four primary segments: Mobile Networks (~ 50% of revenue), Network Infrastructure (~ 30% of revenue), Cloud and Network Services (~ 15% of revenue), and Technologies (licensing, technology development), and Other the balance.