May 15, 2021
Introduction
I am trying to do my best to work on Nokia equity research. I like to learn better by reading equity report. It takes time for me to figure out how to be a smart equity investor as a value investor. I do think that I chose three stocks: GTE, GRAY, NOK to invest more than $10,000 dollar capital, and I like to keep learning and see what I should do better next time.
COMPANY BACKGROUND:
Founded initially as a pulp mill in 1865, Nokia has undergone various business transformations throughout its history, but it was best-known for the mobile phone business, which formed its mainstay throughout 1990s to 2013. However, following the sale of its mobile phone business to Microsoft in 2014, Nokia is now predominantly focused on the telecom infrastructure market. In 2016, Nokia acquired Alcatel-Lucent, strengthening its position as a leading player in the telecom infrastructure market. The company is headquartered in Finland, while its shares are listed on the Helsinki Stock Exchange, New York Stock Exchange, and Paris Stock Exchange. It is one of the major constituents of the OMX Helsinki 25 Index.
DIVISIONAL OVERVIEW: Nokia has three reportable segments -- Networks, Nokia Software, and Nokia Technologies. Networks is the core business segment that accounted for 77% of 2020 total revenue, followed by Nokia Software’s 12% and Nokia Technologies’ 6.4%.
The Networks segment comprises the Mobile Networks, Global Services, Fixed Networks, and IP/Optical Networks Operating segments. Mobile Networks is the key segment that focuses on mobile radio, including macro radio base stations, small cells, and cloud-based radio. Global Services covers services such as network planning and optimization, network implementation, system integration, as well as company-wide managed services. Fixed Networks provides copper and fiber access products, solutions, and services.
Lastly, IP/Optical Networks provides IP routing, packet core, and optical transport systems.
Nokia Software encompasses software solutions and consulting services for customers in the area of customer experience management, network operations, communication, policy & charging, analytics, security, cloud, and Internet of Things. On the other hand, Nokia Technologies (7% of 2018 sales) primarily deals with its intellectual property rights licensing activities.
MARKET COMPETITION: In terms of sales by region, North America contributed 33% in 2020, followed by 30% in Europe and 18% in Asia-Pacific. The remaining came from Greater China, Latin America, and Middle East & Africa. Conditions in the market for mobile and fixed network infrastructure and related services remain competitive and challenging. In 2019, Nokia’s 4G+5G market share was in the range of 27%, excluding China.
In 2020, the market share remained stable at 27%-28%. Despite the ban on Huawei’s 5G equipment from several nations due to national security concerns, it seems that Nokia has not been able to gain much share outside of Europe. Although China is the pioneer in the 5G race that accounts for the majority of 5G spending growth, Nokia’s market share is losing to Chinese vendors and Ericsson due to its strategic reason to exit the unprofitable market. As a result, its revenue from Greater China declined 9% in 2020. Going forward, the market competition remains intense even though we are in the early phase of the 5G investment cycle. For 2021, Nokia expects its market share, excluding China, to be impacted in 2021, primarily due to not converting its 4G footprint into 5G footprint in North America. Therefore, Nokia expects a dip in its market share to 25%-27% in 2021.
CORPORATE STRATEGY: In spite of the challenging industry environment, Nokia will continue to invest in sustaining its network leadership, such as in 5G, while it looks to expand into adjacent markets with higher growth rate, such as in Webscale and selected vertical markets. It also intends to build a strong standalone software business, which we think is in response to the rising adoption of Software-Defined Networking and Network Function Virtualization technology.
FINANCIAL TREND: In 2020, Nokia’s total net sales declined 4% to EUR21.867 billion due to lower network deployment and planning services in Mobile Access. In terms of region sales performance, North America was up 5%, driven by 5G deployment and Europe was up 1% due to market share gains from Huawei.
However, Nokia’s sales declined in Greater China (-25% due to market share loss), Asia-Pacific (-13% due to declining 4G sales and negative impact of Covid-19), and Latin America (-24% due to similar reasons as Asia-Pacific). Non-IFRS gross margin improved 2.5%-pts to 39%, thanks to a strong 5G gross margin driven by higher ReefShark shipment volumes. As the operating expenses were broadly stable, this led to a 1.1%-pts improvement in EBIT margin to 9.7% in 2020. The shipment of “5G powered ReefShark” portfolio increased 43% by the end of 2020, which was above its 35% target. Nokia remains focused on achieving 70% by the end of 2021 and 100% by the end of 2022, helping to improve the 5G gross margin.
Nevertheless, Nokia expects the 2021 EBIT margin to be 7%-10% due to the challenging outlook in North America and ongoing R&D investments.
My NOK stock position
No comments:
Post a Comment