Wall Street’s love-in with Nokia continued on Wednesday, with J.P. Morgan the latest bank to turn bullish on the Finnish telecom equipment maker.
It comes a day after Nokia said it planned to raise 2021 guidance following a strong first half of the year and positive second-quarter trends. That sparked the best one-day performance since April, with U.S.-listed shares of the company climbing 9.4% on Tuesday.
A favorite among retail investors and Reddit users in recent months, Nokia’s ADR has gained 52% so far this year, which already marks its best annual performance since 2013. Shares rose 0.6% on Wednesday to $5.92.
J.P. Morgan analysts Sandeep Deshpande and Varun Rajwanshi lifted shares to overweight from neutral, and the price target to $7.80 from $5.88 (the price target of Nokia was boosted to €6.50 from €4.99).
That came on the heels of plans to raise guidance by Nokia on Tuesday, which the analysts said was likely “just the start of the upgrade cycle, driven by upside to mobile network gross margin.”
“We believe investors should position for the upgrade cycle that is likely to continue to play out over the next 12 months, with 30% upside implied from our new €6.5 PT,” said the analysts.
J.P. Morgan’s upgrade follows last month’s bullish turn on the stock from Goldman Sachs and a Morgan Stanley upgrade in May.
Pekka Lundmark, Nokia president and chief executive officer, last October announced a plan to streamline the business and to do “whatever it takes” to lead in the 5G space. That came with a 2020 guidance cut, which was blamed on the loss of a big North American customer — assumed to be a Verizon deal that was awarded to Samsung. The company in March announced a €600 million cost-cutting program aimed at boosting investment in 5G.
The loss of Verizon has been “more than reflected in estimates,” said the J.P. Morgan analysts, who noted that current consensus has Nokia Mobile Networks sales declining by €626 million in FY21 when the radio access network market, a part of mobile telecommunications systems, is expected to grow 10.5%, as per analysts at Dell’Oro Group.
And due to limited exposure to China, Nokia is seen growing at perhaps half the market growth—i.e. ,10.5% in FY21—which would lead to an implied annual revenue of €10.807 billion versus current consensus expectations of €9.773 billion. “We believe this shows that consensus currently overstates sales lost, and that this loss will be €600m at the low end to €800m at the upper end (vs €1.034 billion implied),” said the analysts.
The analysts laid out two possible scenarios for a turnaround in gross margin for Nokia’s mobile networks business into 2024. One assumes sales returning to 2019 levels based on gains outside the U.S., with gross margin of 40% in one case, and 44% in the best case, which is line with rival Ericsson. Those scenarios result in earnings per share of €0.46 and €0.56, respectively.
J.P. Morgan raised 2021 and 2022 estimates by 2.2% and full-year gross margin estimates slightly. That translates to a 22.3% and 21.3% upgrades to 2021 and 2022 comparable earnings before interest and taxes (Ebit) estimates.
“The shares trade on 19.5x/16.4x ‘21/’22 EPS, but upgrades are likely in future years and the market will be looking at those years as the turnaround gathers pace,” said Deshpande and Rajwanshi.
The company will release its second-quarter and half-year 2021 financial results on Jul. 29.
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