Does Nokia Deserve a Place in Your Portfolio? The price of shares of technology company Nokia (NOK) hit its 52-week high in January 2021, due primarily to Redditors' interest in the name. Although...

The price of shares of technology company Nokia (NOK) hit its 52-week high in January 2021, due primarily to Redditors' interest in the name. Although the stock has performed well so far this year, the question is can it continue to rally on the back of its solid financials? Read on to learn more.

Nokia Corporation's (NOK) is one of the leading companies in the telecommunications equipment industry. Its shares soared to hit their 52-week price high of $9.79 on January 27, 2021, driven by the meme frenzy. However, the Finland-based company's fundamentals are also strong. It generated EUR 77 million ($90.81 million) in free cash flow (FCF) in the second quarter, representing its fifth consecutive quarter of positive FCF.

The stock has gained 56.5% year-to-date and 28.8% over the past three months to close Friday's trading session at $6.12.

Hedge funds have been scooping up its shares lately, which is no surprise given the increasing demand for NOK's products and services worldwide. For example, Vocus, Australia's leading fiber and network solutions provider, deployed the company's solution to set up its 200G optical network. The United Group also chose NOK's solutions on August 11 to deliver its cloud-native core network products in Bulgaria, Croatia, and Slovenia. Furthermore, NOK has revised its full-year outlook. Its net sales are now expected to come between EUR 21.70 billion ($25.59 billion) and EUR 22.70 billion ($26.77 billion). So, its near-term prospects look promising.

Here's what we think could shape NOK's performance in the near term:

Increasing Demand for 5G Infrastructure

Several companies worldwide are focusing on developing 5G infrastructure. In fact, according to a ResearchandMarkets report, the global 5G Infrastructure market is expected to grow at a 49.8% CAGR over the next seven years.

Since NOK is making several advancements in the 5G infrastructure space, it is expected to benefit significantly from the industry tailwinds. For example, the company announced on August 3 that it had achieved the first 5G carrier aggregation call in standalone architecture with Taiwan Mobile. Also, NOK constructed a 5G standalone network extension for the Estonian Cyber Range last month.

Strategic Partnerships

On July 27, 2021, Empire Access extended its partnership with NOK to deliver up to 10GB/s speeds to new subscribers in the Greater Binghamton region, west of the Catskill Mountains in New York state. Also last month, Nokia and Export Development Canada (EDC) also announced an expanded global partnership aimed at investments in 5G and the next-generation network infrastructure for global deployment.

Impressive Financials

NOK's net sales increased 4.3% year-over-year to EUR 5.31 billion ($6.26 billion) for the second quarter, ended June 30, 2021, driven by growth across all business groups, particularly in Network Infrastructure. The company's gross margin increased 290 bps to 41%. Its profit for the quarter was EUR 351 million ($413.97 million), representing a 254.5% year-over-year rise. Its EPS came in at EUR 0.06 ($0.07), up 200% year-over-year.

Favorable Analyst Estimates

Analysts expect NOK's revenue to increase 3.5% in the current year and 2% next year. The company's EPS is expected to increase 6.9% year-over-year to $0.31 in its fiscal year 2022. Furthermore, its EPS is expected to grow at a 16.5% rate per annum over the next five years. In addition, Wall Street analysts expect the stock to hit $7.06 in the near term, which indicates a potential 15.4% upside. Of the 13 analysts that have rated NOK, 10 rated it Buy.

POWR Ratings Show Promise

NOK has an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. Among these categories, NOK has an A grade for Sentiment, in sync with favorable analyst sentiment.

The stock has a B grade for Value, which is consistent with its 16.31x forward non-GAAP P/E, which is 33.8% lower than the 24.62x industry average. In addition, NOK's forward EV/S and P/S of 1.20x and 1.32x, respectively, are also lower than the 3.94x and 3.91x industry averages.

NOK is ranked #16 of 56 stocks in the B-rated Technology - Communication/Networking industry. Click here to access NOK's ratings for Growth, Stability, Momentum, and Quality as well.

Bottom Line

With more than 3,500 of its patent families declared as essential to 5G, NOK is well-positioned to gain from the increasing demand for 5G services. Moreover, the stock looks undervalued at the current price level, considering its massive growth potential. So, we think it's wise to add the stock to your portfolio now.

How Does Nokia (NOK) Stack Up Against its Peers?

While NOK has an overall POWR Rating of B, check out these other stocks within the Technology - Communication/Networking industry with A (Strong Buy) ratings: Extreme Networks, Inc. (EXTR) and Viavi Solutions Inc. (VIAV).

NOK shares were trading at $6.03 per share on Monday morning, down $0.09 (-1.47%). Year-to-date, NOK has gained 54.22%, versus a 19.32% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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