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How Nokia benefits from strong 5G demand



The shares of the leading telecommunications equipment company Nokia (NOK) increased by 8.0% so far on July 25. The stock is currently trading at $ 5.59. Nokia had better earnings than expected in the second quarter, driving the share price higher. Nokia's adjusted EPS was EUR 0.05 in the second quarter, 67.0% higher than analysts' estimate of EUR 0.03.

Nokia's revenues also hit the estimates. The company had a turnover of $ 5.69 billion ($ 6.34 billion), higher than Wall Street estimated at $ 6.04 billion. Revenue and income blow up the stock. Despite the recent upturn, Nokia shares are still down by 3.7% to date.

What affected Nokia's revenue in the second quarter?

Under Nokia's revenue calls, CEO Rajeev Suri accepted that demand in the first half had been weak. Management expects customer demand to increase significantly in the fourth quarter, driven by 5G agreements.

Nokia has already experienced solid 5G demand from developed markets in the US and South Korea. It also expects traction in international markets, including Japan, the Nordic countries, the Middle East, Italy, China and the UK.

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Nokia claims having closed 45 commercial 5G deals to date. However, competition from peers – primarily Ericsson (ERIC) – will keep Nokia on their toes. Nokia, Ericsson and China's Huawei are the best players in the networking space and are struggling to get new 5G deals.

The Ericsson share is down 7.0% this month. Investors warned that increasing competition would affect the bottom line in the next two quarters. Nokia and Ericsson could benefit from the Huawei ban imposed by the US government. Huawei led the market for telecommunications equipment by the end of 2018, but given the growing security concerns, Nokia and Ericsson can place several 5G contracts instead.

What is expected of Nokia in 2019?

Uncertainty about trade war will probably affect Nokia's revenues in the coming quarters. To offset this effect, Nokia has targeted cost savings of EUR 700 million and a reduction in spending. The transition to 5G remains critical, as the telecommunications expense was reduced at an alarming rate after the 4G rollout a few years back.

Suri stated, " There remains a risk in the year, including execution requirements in the second half, trade-related uncertainty and challenges in the Chinese market. Given these risks, we will continue to focus on rigorous operational discipline, delivering on our 700-million cost-saving program, improving working capital management, and promoting the implementation of our strategy. "

Analysts expect Nokia's EPS to be flat this year to $ 0.27 and then rise 48.0% to $ 0.40 by 2020. Analysts expect Nokia's revenue to rise 18.7% annually they next five years. Although Nokia's revenue may fall 2.5% in 2019, it is expected to increase 3.3% in 2021 to $ 26.76 billion.

The Nokia share trades at a future PE multiple of 13.9x. The stock is undervalued by at least 25.0% in view of the five-year income growth. Wall Street analysts have a 12-month price target of $ 6.73 for Nokia, indicating an upside potential of 20.8% from today's price.


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