EUR 850.00 For Business Accounts Only

Morningstar | 5G Infrastructure Demand Tailwinds Position Nokia for a Turnaround; Raising FVE to $7.60

We are raising our fair value estimate to $7.60 per share from $5.50 and believe that Nokia presents a compelling investment opportunity. We are maintaining our no-moat and stable moat trend ratings for the firm. Looking beyond brief tailwinds created by communication service providers' 5G infrastructure spending, we opine that Nokia is positioned to benefit from 5G's additional use cases beyond smartphone communications while experiencing robust growth within its high-margin licensing and royalty programs.

CSPs' multisourcing strategy and pricing power, coupled with formidable equipment supplier competition, make Nokia's primary market difficult to generate long-term sustainable excess returns over invested capital. However, we believe 5G will have a longer build-out period and offer more sales opportunities, such as connecting and monitoring "Internet of Things" devices and cloud edge computing systems. 5G's fastest speeds are generated through short wavelengths that require small-cell antenna sites, and we believe Nokia stands to prosper from this physics limitation. We expect Nokia's robust small-cell portfolio to be in high demand and that a wider array of industries will use Nokia's software and services to control increasingly complex networks. We support Nokia's shift to focus on software as network operations become heavily dependent on software-defined networking that is optimized per installation.

Nokia's licensing business is poised for strong growth via 5G handset manufacturer agreements, and we see upside from Nokia extracting agreements in markets like automotive and consumer electronics. Additionally, we posit that Nokia should benefit from royalties received through a resurging Nokia-branded smartphone portfolio. These high operating margin inflows combined with Nokia's software focus, 5G product and service solutions, and more diversified revenue streams have us forecasting a turnaround story with double-digit adjusted operating margins by 2021.

Nokia's revenue primarily originates from selling telecommunication hardware, software, and services to CSPs. CSP equipment spending provides robust growth during generational wireless upgrade cycles followed by spending lulls. 2018 welcomed the start of the next CSP spending surge that should provide Nokia with tailwinds as 5G networks proliferate. 5G's promise of connecting billions of wireless devices at incredible speed across more spectrum bands, along with more use cases than 4G, may offer Nokia more upside than previous wireless generations. However, we do not view Nokia's core market as moaty since CSPs typically multisource equipment and possess purchasing power over their vendors.

We believe Nokia has a fundamentally strong strategy to remain a leader in its competitive environment. Nokia's networks business has the rare ability to offer end-to-end network hardware, software, and service solutions. We believe Nokia's core operation should benefit from 5G network infrastructures requiring more hardware to cover the increased quantity of spectrum bands. Since 5G's fastest data speeds are short wavelength, Nokia's small-cell antenna systems may be desirable products to properly propagate 5G. In our view, Nokia's solutions could appeal to a wider client base as industries integrate Internet of Things devices within their networks. We expect healthy demand for Nokia's software and service offerings as software-defined networking becomes commonplace and customers desire solutions to optimize increasingly complex networks.