Jul 26, 2021
[5 min Read]
Nokia has been constantly adapting its strategy to change in the market. NOK stock is popular on reddit and has been discussed on NOK forums and other message boards. Based on this we want to see if NOK stock is a good buy at the current price. Based on the current NOK stock price $5.6-$5.8, and the analysis of fair values, $NOK is a buy. We have put more weight on Comps analysis as compared to DCF analysis here, because Nokia has recently changed its strategy and started benefitting from the growing 5G market, thus the true value of Nokia's potential growth would not be reflected by its past performance.
From its humble beginning in 1865 as a single paper mill operation, Nokia has found and nurtured success over the years in a range of industrial sectors including cable, paper products, rubber boots, tires, televisions and mobile phones.
Nokia's transition to a primary focus on telecommunications began in the 1990s. The first GSM call was made in 1991 using Nokia equipment. Rapid success in the mobile phone sector allowed Nokia to become by 1998, the best-selling mobile phone brand in the world.
In 2003 Nokia introduced the first camera phone. In 2011, to address increasing competition from iOS and Android operating systems, Nokia entered into a strategic partnership with Microsoft. In 2014 Nokia sold its mobile and devices division to Microsoft.
In 2020, Nokia had three reportable segments for financial reporting purposes:
NOK had negative Earnings in 2017, 2018 and 2020, so comps analysis on standard P/E will not be insightful.
Peer analysis with comparable companies based on P/S multiple suggests that NOK stock is undervalued. NOK's fair value by P/S analysis ranges from $14.86 to $23.0, averaging at $18.44.
By comparing NOK's EV/EBITDA multiple to that of competitors, fair value for the Nokia stock from $5.83 to $20.20, averaging at $11.9.
Owing to the growth prospects listed above and by going through various online resources, following assumptions can be made about NOK:
Revenue Growth Rate: Revenue growth rate is expected to be high initially owing to the 5G market and it would gradually stabilise over 10 years. Thus revenue is assumed to grow from 10% initially to 1.5% in the year 2030. With perpetual growth rate at 1.5%.
COGS: Cost of revenue is set at 62% - taken as the average of percentage COGS/Revenue from 2017-2020.
Operating Efficiency Increase: Operating Expense is calculated on the basis of target Operating Income set by Nokia. Nokia aims to increase its operating income to 7-10% in 2021 and between 10-13% starting 2023.
WACC: WACC of NOK is between 6.5-7.5%- from finbox. The calculated WACC is 6.33% based on cost of debt, cost of equity and debt to capital ratio.
Taking into consideration the average growth rate of RSI over past years and industry average of public companies, following assumptions have been made for Asset growth rate and Liability Growth Rate for upto year 2030.
Asset Growth Rate: averaging at 1%
Liability Growth Rate: averaging at 1%
PPE Growth Rate: averaging at 7%
D/A Growth Rate: calculated based on PPE and Net PPE, averaging at 53.95%
Based on above assumptions the fair value of Nokia stock is $6.86. The sensitivity analysis of variation in assumptions can be checked in attachments below.
Based on our analysis, NOK stock is a buy because it is undervalued. We have put more weight on Comps analysis as compared to DCF analysis because Nokia is changing its strategy and pivoting to Mobile Network, Network Infrastructure and Cloud and Network Services as well as benefiting from the growing 5G market. Based on past performance DCF would result in undervaluing the stock. Below is the summarized price range of NOK stock based on various analyses, which can also be represented in the football field (image attached below).