For many years, investors have been questioning the opportunity of owning Nokia or a telecom equipment company as the sector built a long track record of profit warnings.

1-A long history of profit warning

°The first wave of Nokia Profit Warnings was mostly related to the legacy of mobile handset business. Despite billions invested in the handset activity, Nokia was challenged on the low end by Asian manufacturers and on the high end by Apple with the launch of the iPhone in 2007. After years of errancy and massive investments with negative returns, Elop, the CEO of Nokia from 2010 to 2014, miraculously managed to find a buyer for the handset activity in 2013: Microsoft.

°The second wave of profit warning started with the emergence of Huawei as a leading mobile manufacturer leveraging its Chinese strong market dominance and raising international market share by cutting prices. Thanks to Donald Trump, Huawei was banned from all high-margin telecom equipment markets in 2017/2018.

°The third wave of Nokia profit warning was related to the previous Nokia management team who acquired Alcatel with a bad timing (end of 4G cycle in 2015) at bad price and wasted a lot of time and money integrating the 2 businesses. They were obsessed with short term share performance (stock options) and distracted from Nokia main task: A proper roll out of 5G products in 2019 especially in the key North America market. During this last phase, Nokia lost important contracts to its main competitor Ericsson.

2-The new Nokia: from profit warning to pricing power

In 2021, Nokia board decided to change CEO and appointed Pekka Lundmark a Nokia veteran who was successfully running another company but had a good understanding of Nokia challenges. Pekka Lundmark first announcement was a massive reinvestment in the 5G product line aimed at closing the quality gap with Ericsson.  A new company is emerging with the first vivid results last week.

°The reinvestment phase is paying off: All 4 segments of Nokia (network, mobile network, cloud, and licensing) are growing and gaining market share in the key 5G mobile segment.

°Nokia has also decisively invested in the Enterprise segment up 50% in Q4 2022

°There has not been any profit warning for the last 2 years….

Conclusion

Nokia is now well positioned on a structurally growing market (5G infrastructures market which is 8 billion in 2022 is expected to be 25 billion in 2025 according to Precedence Research). The political exit of Huawei market is creating a duopoly: with Nokia and Ericsson. This duopoly means stronger pricing and better margins for Nokia. The market has yet to recognize these changes with a likely re-rating in the offing.

EV/EBITDA still trades below 5X. this sounds fair level for a serial profit warner but very cheap for a profitable leader in a market expected to threefold in the coming years.