Michael Vi
Nokia Oyj (NYSE:NOK) investors have been rightfully disappointed by the company’s performance in recent years. Every time I read comments under articles on NOK here on Seeking Alpha, I see many people who had once believed in a turnaround but have given up their hope. Even since my last article on NOK from September 2023, in which I reviewed the potential of a recovery in 2024, the stock has declined another 9%, not considering dividends. Almost one year later, the situation has seemingly worsened as Nokia’s revenue has been declining by double digits over the last three quarters.
While I still don’t find NOK to be a wise investment at the moment, I do keep the stock on my watchlist, and there have been some positive news lately regarding Nokia’s new promising partnerships in the areas of AI, 5G, and private networks. If the company manages to profit from these deals, it might finally return to revenue growth in the coming years. Coupled with expected margin expansion, this makes the stock interesting to watch in the next quarters.
Nokia’s partnership base is growing and now includes prominent AI names like Nvidia, Dell, and Google
Over the last few months, Nokia has been making an increased number of headlines by expanding its partnership network. It seems that the company is actively trying to turn itself around by exploring opportunities specifically in the areas of AI and 5G.
Back in February this year, Nokia unveiled a new deal with Nvidia (NVDA) and an extended partnership with Dell (DELL); the two companies are on the forefront of AI-focused hardware.
The partnership with Nvidia focuses on “AI-ready radio access network solutions,” which is a way of saying that Nokia will use Nvidia tech in its RAN (Radio Access Network) and Cloud RAN solutions; the latter is an important technology for edge computing, which is often regarded as essential for AI development.
According to the company, this is a continuation of their anyRAN approach which lets customers build communications infrastructure fast, using hardware and software from various vendors interchangeably. Tommi Uitto, President of Mobile Networks at Nokia:
This is an important collaboration with NVIDIA that will explore how artificial intelligence can play a transformative role in the future of our industry. It is a further example of our anyRAN approach that is helping to make Cloud RAN a commercial reality.
The partnership with Dell is reported to work both ways: Nokia will use infrastructure solutions from Dell while the latter will make Nokia its preferred private wireless partner for enterprise edge use cases. From what I read, this deal is again focused on high-scale edge computing solutions, which means Nokia likely aims to increase its AI exposure here.
More recently, Nokia announced it will team up with another AI player, Alphabet (GOOG)(GOOGL). According to the company, Google’s solutions like Vertex AI and Gemini 1.5 Pro will become available in its Network as Code platform, which will run on Google Cloud. This should enable developers to “create new 5G enterprise and consumer applications faster for their customers,” enabling access to common AI models in their applications. In turn, Google Cloud users should gain access to standardised 5G network capabilities through Nokia’s platform.
There have been plenty of network-focused partnerships unveiled in the recent months as well:
- Telefónica’s (TEF) German unit, O2, will use software from Nokia to shift its 5G customers to Amazon (AMZN) Web Services cloud.
- Ned Zealand-based communication provider 2degrees selected Nokia’s 5G core Registers and Shared Data Layer software.
- Japan-based Rakuten Mobile selected Nokia to supply RAN solutions supporting the low 700MHz spectrum band, which Rakuten received approval for in October 2023.
- Wipro (WIT) announced it will form a joint 5G private wireless solution with Nokia.
So overall, Nokia seems to be working hard on expanding its foothold in AI and private 5G network solutions, clearly trying to secure its future in these promising technologies.
The partnership network expansion might finally give Nokia a boost
Driven by its business missteps, Nokia’s financial performance has been in decline over the recent quarters. Notably, before the September 2023 quarter (FQ3 2023), the company had been on a relatively solid track in terms of revenue growth and positive earnings. As I mentioned in my previous article about the company, Nokia’s management showed prudent financial management with steadily increasing margins and a decent net cash position.
However, the situation started to change in FQ3 2023, when the company did not meet revenue expectations despite doubling sales in India due to the low demand in North America. The problem only exacerbated in FQ4 2023 when the company lost its contract with AT&T (T) to Ericsson (ERIC). It is reported AT&T plans to spend about $3 billion a year over its five-year contract with Ericsson, which could have been about 15% of Nokia’s yearly revenue.
From there, it is evident Nokia’s new partnerships are crucial for the corporation’s future performance. The combined TTM revenue of the three AI companies Nokia made partnerships with is about $489 billion. If Nokia manages to capture just half a percent of that revenue, it could result in an additional $2.5 billion per year for the company, leading to a more than 10% increase in sales. Clearly, this is just an overly optimistic guesstimate, but it still shows the significant potential Nokia’s new partnerships hold. Along with several new network deals, Nokia might surpass the negligible 1% revenue growth estimate that the market projects for the next 3 years.
Currently, the stock is valued at around 12.6 times operating income, with about 7% TTM operating margin. According to the management, Nokia is on track to reach 13% operating margin by 2026. Now, if the company grows its revenue closer to high-end estimates for 2026, which is about $25.3 billion, and indeed reaches 13% operating margin, NOK might reach $41 billion market capitalization, using the current multiple. This is about two times higher than the current number.
Again, this is a notably optimistic scenario. However, given the particularly low expectations set for the company, Nokia might still surprise the market thanks to the new deals and potential AI/5G developments. With about $4.5 billion in annual R&D spend, Nokia has the resources to jump on the technological train here.
Key takeaways
To sum up, NOK has been a disappointing stock over the last years apart from some quick-lasting jumps fuelled by speculative trading. The company has been consistently underperforming in the recent years, from not meeting its own revenue outlooks to losing prominent customers like AT&T. Now, with a plethora of promising partnerships with such AI-driven companies like Nvidia, Google, or Dell and network deals with Wipro, Rakuten Mobile, and O2, Nokia tries to revitalize its growth once again.
The efforts might take some time to actually start impacting the company’s financials. However, the new partnerships hold significant potential for revenue and margin expansions, and under an optimistic scenario, the stock might potentially double by 2026. This makes the upcoming quarters interesting to monitor for early signs of a return to growth. Until these signs are evident, I still find it wiser to watch NOK from the sidelines.