Nokia Stock Gets an Upgrade Because Ericsson’s Earnings and 5G Performance Were So Good
The telecommunications sector has been largely insulated from the impacts of the Covid-19 pandemic.
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Swedish telecoms giant Ericsson posted such good earnings last week that optimism has spread to Nokia, which received an upgrade on Monday from Norway’s largest investment bank.
DNB Markets upgraded Finland’s Nokia to buy from sell and raised the target price on the stock from €4 ($4.83) to €4.8.
Nokia was thrust into the spotlight last week and its stock was boosted amid a wider retail trading frenzy, but shares in Nokia fell near 2% in Monday trading, hovering around €3.95. The stock began last week at €3.83 before surging 12.9% on Monday and then 13.8% on Wednesday, reaching €4.40. It then fell 13% on Thursday.
The fact that the share price gave up gains from last week’s rally was one reason DNB Markets upgraded the stock. “Relevant read-across” from Ericsson’s strong recent results also played a major role.
Last Friday, Ericsson reported that it had gained market share in Europe, as it became a more profitable 5G player with stronger margins. The stock jumped 8% after the company posted operating income figures that crushed expectations.
A Must-Read:Nokia Stands to Gain From 5G Spending. And Its Stock Is Cheap.
“While Ericsson has clearly taken market share from Nokia in recent years, we believe very recent tailwind is due more to geopolitical factors,” said Frank Maaø, an analyst at DNB Markets.
Ericsson reported that it saw strong preorder signals from customers in the coming quarter. Maaø said that this fit with DNB’s analysis that executives at companies were weighing the risks of investing in 5G technology from Chinese telecom Huawei, which has been banned from some Western networks.
“We believe Nokia, which is gradually catching up on 5G [radio access networks], would also be a key beneficiary of such a trend,” Maaø said.
DNB’s view is that there could be momentum building in 5G equipment demand from operators that currently get their gear from Chinese suppliers. These operators may “feel an increased urgency during 2021 to diversify and de-risk their supplier base,” Maaø said, and Nokia is expected to be a “key beneficiary” of this trend.
Plus:Nokia Stock Is Surging. The Company Says It Can’t Explain It.
In addition, Ericsson tripled its share of business in Japan over the past three years as 5G rollouts picked up speed. Maaø said that “Nokia should also be a beneficiary of this, given its position with all the Japanese operators.”
DNB Markets also listed Nokia’s capital markets day in March as another catalyst for confidence in the company’s ability to return to higher margins in the medium and long term.
The telecommunications sector has been largely insulated from the impacts of the Covid-19 pandemic. Millions of people housebound and working from home through lockdowns have kept demand for services high.
The pandemic did delay what many investors had expected to be a 5G “supercycle”—massive growth in stocks exposed to the next generation of mobile internet technology. As 2021 gets under way, investors are closely watching new developments in 5G.
