How Nokia Corp. (NOK) can capitalize on 5G evolution

Nokia Corp. (NOK) recently announced a partnership with Canada-based Telus. The agreement mostly revolves around the 5G related offerings of the Finland-based telecommunications company.

The Finnish company will offer its subscriber data management and LTE indoor picocells, according to the terms of the agreement. Telus will also deploy Nokia’s policy controller and NetAct network management, as well as LTE indoor picocells.

Nokia believes the technology will enable the Canadian mobile operator to manage its network at reduced costs, besides offering it more control over service-level arrangements, specifically those requiring low latency.

Speaking on the deal, Chief Technology Officer at Telus, Ibrahim Gedeon said in a statement “with an exponential increase in capacity, bandwidth and speed, 5G will change the way we live and work by fostering Canadian innovation and growing several key verticals of our economy.”

5G deals

Nokia is lagging behind its rivals, such as Ericsson, in securing 5G contracts. Nevertheless, the company has managed to secure some great deals. It is also testing the 5G roll out with some partners. Nokia, Elisa, and Qualcomm last week announced that they achieved a 5G landmark speed of more than 8Gbps. The experiment was conducted at Elisa’s flagship store located in Helsinki.

Earlier this month, Nokia announced that it has joined hands with Austria’s  mobile network operator A 1. The two companies will work on LTE and 5G campus networks in the country, according to the three-year agreement. Both companies have already successfully installed several campus networks in the country.

Nokia and A1 will work as technology partners to enable high-performance LTE and 5G network in the country. Moreover, A1’s customers will also take advantage of Nokia’s proven expertise in artificial intelligence (AI), digitalization, and network slicing.  

Potential growth opportunities

Nokia is competing in the 5G space mainly with China’s Huawei Technologies and Sweden’s Ericsson. However, the potential 5G markets, especially the U.S. and many European countries have shattered Huawei participation in the 5G race by imposing a ban on the Chinese company over security reasons.

Many European countries, such as the U.K. and Sweden, have ordered local telecom operators to phase out Huawei equipment from their 4G and 5G networks. So, those mobile operators are left with no choice but to turn to Ericsson and Nokia due to limited options.

Ericsson and Nokia are expected to greatly benefit from increasing opportunities, as more countries phase out Huawei’s equipment from their network in the coming years. However, mobile network operators and governments always want to limit risk by diversifying their supply options.

Experts believe if Huawei is forced to leave Europe, then it will not only create growth opportunities for established 5G players but also for the new ones stepping into the market.

There are four key players in the telecommunications equipment market including Nokia and Ericsson based in Europe, while Huawei and ZTE based in China. Designing innovative technology such as 5G is expensive and its deployment around the world requires a lot of expertise.

The telecommunication equipment industry has seen frequent consolidations over the years mainly encouraged by cost-saving and portfolio expansion goals. For instance, Nokia had inked merger deals with Alcatel-Lucent, Siemens, and Motorola in the past. The previous consolidations in the industry is one of the main reasons that we are seeing limited players in the 5G market right now.

If we rule out Huawei from the list, the European operators will be left with two options, i.e. Nokia and Ericsson. Moreover, new players cannot compete with these companies, as they lack the expertise and equipment required by the mobile operators for 5G upgrades.

Nokia vs Ericsson

Nokia lags behind Ericsson in terms of financial performance. Ericsson reported better-than-expected earnings in its last quarterly report. Moreover, it has secured more contracts including 5G deals with three key mobile network operators of China, besides increasing its foothold in the European and Gulf countries.

On the other hand, Nokia reported mixed financial results in the latest quarter and also cut its outlook for the next fiscal year, suggesting that it is unable to keep up with its rivals, as of now. The company is still struggling to recover from its 2016 Alcatel deal, which has also hurt its 5G efforts.

Restructuring plan under new leadership

Nokia’s new CEO Pekka Lundmark clearly said that the company will do whatever it takes to dominate the 5G market. He also plans to make significant changes in the internal structure of Nokia.

The Finnish company lost a key 5G RAN agreement with Verizon last month. While commenting on the lost contract, Lundmark said Nokia might experience margin pressure after losing the deal. He also added that the company needs to boost its R&D spending to become a leader in the 5G space.

Quarterly performance of Nokia

Nokia shares fell more than 17 percent on the day it announced its financial results for the third quarter.

The company reported earnings of 203 million euros for the quarter, up more than two folds from the same quarter of 2019. On an adjusted basis, profit per share was 5 euro cents. Revenue came in at 5.29 billion euros, down 7 percent from the comparable period last year.

However, Nokia revised its adjusted earnings guidance for 2020. It now expected adjusted profit of around 23 cents per share, slightly down from its previous projection of around 25 cents. It also lowered its operating margin guidance to 9 percent from 9.5 percent.

Moreover, it projected adjusted operating margins in the range of 7 to 10 percent, below analysts’ average estimate of about 11 percent.

Analysts coverage

Overall, 28 analysts have set a price target for Nokia stock. They have an average price target of $4.40, representing a rise of nearly 7 percent from the stock’s closing price of $4.13 in the last trading session. The stock has a high price estimate of $6 per share, and a low-price target of $3.38 per share. When it comes to ratings, most analysts have set a “Buy” rating for the stock.