Investments In IP Networks And 5G Will Strengthen Market Position

Key Takeaways

• Accelerated investments in IP Networks and the Infinera acquisition aim to drive growth in the data center market, boosting revenue and earnings.
  
• Expansion in Mobile Networks and Cloud Services, including 5G adoption and private wireless solutions, promises potential revenue growth and improved margins.
  
• Dependence on emerging markets and recent acquisitions poses risks due to economic volatility, competitive pressures, and execution challenges, potentially impacting profitability and margins.

Catalysts

Provides mobile, fixed, and cloud network solutions worldwide.

• Nokia's accelerated investments in its IP Networks business, with additional annual operating expenses aimed at generating €1 billion in incremental net sales by 2028, suggest potential revenue growth in the data center market.
  
• The planned acquisition of Infinera, expected to close in the first quarter of 2025, is anticipated to strengthen Nokia's position in optical networking and expand growth opportunities in the data center market, likely boosting revenue and earnings.
  
• The solid deal momentum and increased base station wins in Mobile Networks, along with expansion into defense and private wireless sectors, may stabilize and potentially increase revenue, countering region-specific declines.
  
• Growth in Cloud and Network Services, driven by increased adoption of 5G standalone core networks and private wireless solutions, suggests potential for revenue growth and improved operating margins.
  
• Nokia's strategic licensing agreements in Nokia Technologies, particularly in the multimedia and video streaming sectors, indicate progress toward increasing annual net sales run rates, which could enhance revenue and earnings.

Nokia Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nokia Oyj's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.9% today to 8.6% in 3 years time.
• Analysts expect earnings to reach €1.9 billion (and earnings per share of €0.35) by about April 2028, up from €1.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €2.2 billion in earnings, and the most bearish expecting €1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2028 earnings, up from 13.2x today. This future PE is greater than the current PE for the US Communications industry at 13.8x.
• Analysts expect the number of shares outstanding to decline by 2.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.62%, as per the Simply Wall St company report.

Nokia Oyj Future Earnings Per Share Growth

Risks

• Nokia's reliance on growth from emerging markets like India could pose risks due to economic volatility or regulatory changes, potentially impacting revenue and sales forecasts.
  
• The integration and success of recent acquisitions, such as Infinera, are critical for achieving future sales growth targets, but carry execution risk, which could affect net margins and profitability.
  
• Ongoing competitive pressures from Chinese vendors, especially in non-U.S. markets, may lead to aggressive pricing strategies that could compress margins and impact earnings.
  
• Nokia's increased R&D and go-to-market investments, earmarked at €100 million annually for the data center sector, will raise operating costs, and any delay in achieving the targeted €1 billion additional sales by 2028 could pressure operating profits.
  
• The dependence on continued strong performance in IP Networks and growth in new segments like 5G and enterprise solutions entails market uncertainties, which could unexpectedly shift and affect Nokia's long-term revenue streams.

Valuation

• The analysts have a consensus price target of €4.947 for Nokia Oyj based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €6.05, and the most bearish reporting a price target of just €3.7.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €21.9 billion, earnings will come to €1.9 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 6.6%.
• Given the current share price of €4.15, the analyst price target of €4.95 is 16.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.