Why Nokia Is Up 25% in 2018
After several years of disappointing performance, Nokia (NYSE: NOK) has begun to show signs of life. As of this writing, the stock is up 25% in 2018. The provider of mobile network equipment and technology has been benefiting from new projects in the global telecom industry, and there's optimism this year's positive traction won't be a one-off.
Getting back on track
After a merger with its peer Alcatel-Lucent in 2016, Nokia has been working on integrating the two operations and cutting costs. While overall sales have fallen in 2018, the trend improved in the third quarter. Plus, expense cuts have helped Nokia return to positive free cash flow -- money left over after basic operations and capital expenditures are paid for.
Metric | Nine Months Ended | Nine Months Ended | Increase/Decrease (YOY) |
|---|---|---|---|
Revenue | 15.7 billion EUR | 16.5 billion EUR | (5%) |
Operating profit (loss) | (611 million EUR) | (403 million EUR) | N/A |
Earnings (loss) per share | (0.13 EUR) | (0.19 EUR) | N/A |
YOY = year-over-year. EUR = Euros. Data source: Nokia quarterly earnings.
Management said that it has been seeing increasing strength in all areas of its business. Nokia Technologies -- which makes high-profit-margin licensing fees off of branded devices like mobile phones -- continues to grow, up 19% in the last quarter when excluding a one-time catch-up payment last year. The company's software and related services are also performing well, up 4% in the third quarter -- benefiting as cloud computing for enterprises becomes an increasingly important part of today's technology-driven business operations.
Nokia thinks its progress will continue into 2019 and 2020. Underpinning that confidence are new developments in mobile networks, an area that Nokia has especially pinned its hopes to.
Image source: Getty Images.
Building the next wave of mobility
New 5G mobile networks are in late stages of testing and just barely beginning to roll out for general use. America's leading telecom, Verizon (NYSE: VZ), just released a 5G internet service for home, and multiple mobile providers expect to start offering the next-gen network for phones in 2019.
That helps Nokia's "networks" business, an important segment as it generated 89% of all sales through the first three quarters of the year. Profit margins have been under pressure for networking hardware and services the last few years, but the launch of 5G should change that. As telecoms around the world begin to purchase equipment to build what will become the new mobile communications standard, Nokia says its orders will rise -- a trend that has only just begun.
That is evident in some of the business activity that was talked about in the third quarter. Nokia said it inked several multiyear 5G deals in North America and Japan, and its testing of 5G in China continues to make progress. As a result of these trends, Nokia sees its adjusted operating profit margin landing in the 9% to 11% range for full-year 2018 and improving to 12% to 16% by 2020.
That optimism is what has led to Nokia stock's 25% rebound this year. While shares are still a far cry from highs reached a decade ago, this stock could continue to recover some value in the years ahead as Nokia floats on the rising 5G tide.
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Nicholas Rossolillo and his clients own shares of Verizon Communications. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
