Since its unveiling of an Internet of Things network grid as a service at Mobile World Congress (“MWC17”) in February and announcing updates to its 5G foundation, investors have warmed up to Nokia Corp (ADR) (NYSE:NOK) again. Analysts from Morgan Stanley and Charter Equity both upgraded the company.
Yet, its outlook is unlikely related to the Nokia 3310 resurrection. The good news is that Nokia’s prospects are getting better as the network unit restructures.
NOK Shakes Things Up
On March 17, Nokia’s head of mobile networks, Samih Elhage, said he will leave the company. Nokia is breaking the networks business into two units: one to services and the other to mobile networks. Investors should have expected the restructuring.
But last year, the network business slowed and Nokia lowered its outlook for 2017. Telecom companies are slowing their demand for 4G broadband equipment. So selling 5G equipment is Nokia’s source for future growth, but customers are not in any immediate rush to upgrade to this new technology.
The restructuring is good news for suffering shareholders. Having one less executive will save on salary costs and have one less layer of decision making. The creation of an innovation and operating unit should drive higher efficiency in the R&D activities at Nokia.
Slowing demand for network equipment will heighten competition, too. And Ericsson (NASDAQ:ERIC) already warned in its last quarter that it expected a tough market in 2017. Nokia’s integration of the Alcatel-Lucent unit requires wringing out costs and speeding up innovation.
More Reasons to Love NOK Stock
NOK’s 3310 phone resurrection is not an entirely laughing matter. Not everyone in the world needs an expensive iPhone from Apple Inc. (NASDAQ:AAPL). But any additional revenue Nokia earns from selling cheap handsets will only help the company’s bottom line. The benefit of not owning and manufacturing the phones is that it earns royalty revenue. This revenue line carries attractive profit margins.
Despite rallying 37% from its yearly low, Nokia’s stock still offers investors a 5.4% yield. Income investors may find Nokia’s risk-reward profile attractive. Growth is moderating and may even miss expectations, but investors will get paid in the interim. In 2018 and beyond, demand from telecom carriers may pick up again as customers spend on 5G upgrades.
Bottom Line on NOK Stock
Even before North American carriers embrace the faster network, China may upgrade first. Companies like China Mobile Ltd. (ADR) (NYSE:CHL) are eager to make the necessary infrastructure upgrades that accommodate for the sheer growth of mobile users. China Mobile’s revenue grew 7% year-over-year. It added 27 million users in 2017 and has 849 million users in total. Thanks to 4G installations, the mobile carriers will benefit from higher ARPU (average revenue per user).
What’s more, operating efficiencies are set to improve in the quarters ahead. Led by the restructuring in networking, the other ignored units have the potential to generate profits. Handset sales bearing Nokia’s name is a positive development for the business transformation. Look for Nokia expanding its line of Android tablets sometime this year. At little cost for Nokia, even a tablet launch will earn the company IP revenue.
As of this writing, Chris Lau was long Nokia stock.
