Nokia (NYSE:NOK) has been a sleeping tech giant for the past five years, but suddenly it woke up in 2021. Now, the company has a major business transformation underway. But more importantly for NOK stock investors, it has achieved remarkable financial performance this year. Shares are up by approximately 52% year-to-date (YTD), outperforming the S&P 500.
Back in August, I wrote another article about Nokia, arguing that a solid comeback was in the works. At the time, I argued investors should be cautious but also liked the business transformation.
Nokia has evolved from a mobile phone maker to a provider of many tech products, such as networking solutions and telecom infrastructure, network security solutions and smart TVs. Currently, however, its biggest emphasis is on the future of 5G, though. As such, NOK stock is a promising 5G play as well as an interesting pick for both value and growth.
NOK Stock: A Series of 5G Deals
Nokia has engaged in many strategic deals in 2021 as it invests heavily to become a key player in 5G technology.
There have been several notable news items. For instance, take its agreements to develop and offer the first 5G network in Bangladesh, improve broadband connectivity in Canada and install a 5G private wireless network for Volkswagen’s (OTCMKTS:VWAPY) factory in Wolfsburg, Germany. The company is also working on modernizing and improving network performance in South Korea. Finally, it signed a five-year agreement with Ooredoo “to bring multiple technologies and services, including 5G, to customers in [the] Middle East, North Africa, and South-east Asia.”
Nokia has been very active in signing all of these strategic partnerships with a strong emphasis on 5G. But what I also like about NOK stock is the company’s entrepreneurial culture. Nokia seems to always be seeking new sources of revenue.
As an example, I’ll pose a question: what do stadiums have in common with 5G? What Nokia sees are lots of fans and tons of potential for commercialization.
The company recently announced that, on Aug. 1, it accommodated the Bloomfield Stadium in Tel Aviv, Israel with its 5G capabilities. Specifically, there was an important international football match. In collaboration with Cellcom, the company demonstrated its ability to provide connectivity and facilitate coverage of important sporting events, opening the way for new revenue streams like subscriptions, advertising and sponsorship deals. Nokia outlined just how 5G could revolutionize how sports (and other events) are watched worldwide:
“For those who remember being unable to make a voice call at a crowded event not too many years ago, enhanced capacity alone is of great relief. But, of course, today’s […] creators, expect much, much more […] 5G delivers on their demands while creating new growth opportunities for the many industries that may have been ‘on hold’ during the global pandemic over the last 18 months […] Much of those opportunities will be made possible in the near future as 5G is used to connect thousands of cameras and sensors around stadiums.”
Q3 Earnings Saw Improvements
From 2016 to 2020, Nokia had been unprofitable for each year except 2019. In 2020, it reported a huge net loss of $2.52 billion. But in 2021, there has been a very strong turnaround in profitability, with positive net income in all three quarters until late September. Therefore, Nokia is expected to report a profitable fiscal 2021, sans drama.
In the third quarter, Nokia increased its net sales, gross margin, operating profit and diluted earnings per share (EPS) year-over-year (YOY) by 2%, 360 basis points, 43% and 100%, respectively.
My focus however, is on its free cash flow (FCF) generation. This a key metric that Nokia performed very well on. Q3 marked the sixth quarter in a row of positive FCF. I like this consistency and hope to see it continue as NOK stock progresses.
Strong Signals of Value in NOK Stock
When it comes down to it, NOK stock appears to be relatively undervalued right now. It’s now a value stock in the technology sector.
For example, Nokia currently has a forward price-earnings (P/E) ratio of 19.32 versus the median sector P/E of 30.04. Further, it has a forward EV-sales ratio of 1.19 (versus 4.13) and a forward price-sales (P/S) ratio of 1.35 (versus the sector P/S of 4.12). All told, NOK appears to be trading at a significant discount, making it relatively attractive now.
According to Zacks Research, the company’s expected three- to five-year EPS growth is also 10.42%. This is both a considerable figure yet not excessive. Things may turn out far better than this expectation. Still, I would like to see more than 2% sales growth over the next few quarters; revenue growth over past five years has been thin.
Overall, I like Nokia’s financial performance a lot. As an investor, I would wait to analyze full-year results. I’d also wait for the first one or two quarters of 2022 to see if its positive FCF persists. If Nokia can initiate a dividend policy, it would be great news for shareholders as well. For now, though, don’t rush into accumulating shares. Instead, keep this tech stock on your potential buy list for 2022.
On the date of publication, Stavros Georgiadis, CFA did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.