Nokia Corporation: Positive Developments, Free Cash Flow

NOTokia Corporation (NYSE: NOK) develops international mobile and fixed network solutions. The company operates through four divisions: Mobile Networks, Network Infrastructure, Cloud and Network Services and Nokia Technologies.

Nokia is currently seeing a strong initial appetite for 5G in the most progressive and advanced mobile markets. The Finland-based company is the only end-to-end mobile network provider working with major operators in the United States, China, South Korea and Japan.

Nokia’s investments today are paving the way for its customers to go commercial when 5G devices and spectrum become widely available. The company is already seeing increased adoption of 5G, with customers expanding their relationships as we move forward.

For example, Nokia recently announced that it has been chosen by Japanese mobile operators SoftBank and KDDI as one of the vendors to deploy Japan’s shared RAN. Through this, Nokia will provide 5G services to SoftBank and KDDI subscribers in the country.

In my opinion, Nokia is well positioned to take advantage of the growing total addressable 5G market. The company is financially strong and generates positive free cash flow.

That said, following the suspension of its dividend last year, the predictability of Nokia’s potential total returns has been more hazy amid the lack of tangible capital returns. For this reason, I am neutral on the stock.

Latest results

Nokia’s latest results are largely in line with expectations. For the third quarter of 2021, Nokia reported constant currency sales growth of 2%, limited by expected headwinds in the supply chain and mobile networks in North America.

The company saw stronger sales growth in its Network Infrastructure segment, which grew revenue 6% year-over-year, and in its Cloud and Network services, which saw revenue growth of 12%.

Following strong scaling, comparable gross margins stood at 40.8%, a 360bp increase from last year. Specifically, the relative gross margin of mobile networks was 37.8%, a year-over-year growth of 220 basis points as a result of improved cost competitiveness.

Therefore, cost effective also expanded. Comparable diluted EPS was € 0.08, an increase of 60%, while free cash flow generation was quite strong at € 0.7 billion, reflecting strong operating income and a decrease minimal cash flow related to net working capital.

For fiscal 2021, Nokia expects free cash flow of around 600 million euros lower than its operating profit, mainly due to the company’s prepayments with certain licensees in previous years.

In my opinion, due to Nokia’s CAPEX-demanding business model, generating positive free cash flow is what is essential for the company to generate long-term shareholder value. Recent results and forecasts for the year are therefore certainly reassuring.

It should also be noted that Nokia has a net cash position of approximately 4.3 billion euros and a total cash balance of approximately 9.4 billion euros.

Therefore, the company should comfortably deal with any debt maturities going forward, while, combined with its generation of positive cash flow, Nokia should be able to continue to grow without significantly increasing debt or diluting. shareholders.

The Taking of Wall Street

When it comes to Wall Street, Nokia has a strong buy consensus rating, based on three awarded buys and hold in the past three months. At $ 7.23, Nokia’s price target implies upside potential of 14.6%.

Disclosure: At the time of publication, Nikolaos Sismanis does not have a position in any of the titles mentioned in this article.

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