Nokia Corporation (HEL: NOKIA, NYSE: NOK) presents a complex investment proposition within the evolving telecommunications landscape. While the company demonstrates strength in 5G infrastructure deployments and holds a valuable patent portfolio, persistent headwinds in its licensing business and margin compression warrant a cautious approach. We initiate coverage with a Hold rating and a 12-month price target of €4.80, reflecting a balanced perspective on the company’s potential and challenges.
Industry Overview
The global telecommunications equipment market is experiencing a period of dynamic transformation, driven by the ongoing rollout of 5G networks and increasing demand for high-bandwidth connectivity. Industry growth is projected to remain robust, with a compound annual growth rate (CAGR) of 5.4% expected between 2023 and 2028, reaching a market size of $661.68 billion.1 This growth is fuelled by factors such as the increasing adoption of Internet of Things (IoT) devices, the proliferation of cloud computing, and the rising demand for high-quality video streaming services. However, the industry faces challenges, including intense competition, supply chain disruptions, and geopolitical uncertainties.
Company Analysis
Nokia operates across four business segments: Mobile Networks, Network Infrastructure, Cloud and Network Services, and Nokia Technologies. The company’s core revenue streams are derived from the sale of telecommunications equipment and patent licensing. While Nokia has made strides in 5G deployments, its recent financial performance reveals a mixed picture. In Q1 2025, Nokia reported revenue of €5.0 billion, representing a year-over-year decline of 8%.2 This decline can be attributed, in part, to the underperformance of the Nokia Technologies segment, which experienced a 52% drop in revenue due to the non-renewal of a significant patent license agreement.2 However, the Network Infrastructure segment showed resilience, with an 11% year-over-year growth.2 Gross margins contracted to 41.5%, reflecting pricing pressure and supply chain constraints.2
Investment Thesis
Our investment thesis on Nokia rests on the premise that the company’s long-term success hinges on its ability to navigate the evolving telecommunications landscape by capitalising on the 5G expansion, streamlining its operations, and resolving licensing challenges. We believe Nokia’s deep expertise in network infrastructure, coupled with its significant patent portfolio, positions the company to benefit from the ongoing transition to 5G and beyond. Furthermore, Nokia’s focus on Open RAN (Radio Access Network) technology could disrupt the traditional telecom equipment market and create new growth opportunities. However, the company’s near-term performance is likely to be influenced by its ability to stabilise its licensing business and improve profitability. Key catalysts for Nokia’s share price appreciation include successful negotiation of new licensing agreements, sustained growth in Network Infrastructure, and margin expansion through operational efficiencies.
Valuation & Forecasts
We employ a discounted cash flow (DCF) model to arrive at our target price of €4.80. Our base case assumes a revenue CAGR of 2% over the next five years, with a gradual recovery in gross margins to 43%. We also incorporate a terminal growth rate of 1% and a weighted average cost of capital (WACC) of 8%. Our sensitivity analysis reveals that the key drivers of valuation are revenue growth and margin expansion. A more optimistic scenario, with 5% revenue growth and 45% gross margin, implies a price target of €6.50. Conversely, a pessimistic scenario, characterised by flat revenue growth and continued margin compression, suggests a downside risk to €3.50.
| Year | 2025 | 2026 | 2027 | 2028 | 2029 |
|---|---|---|---|---|---|
| Revenue (€B) | 21.5 | 22.0 | 22.5 | 23.0 | 23.6 |
| EBITDA (€B) | 3.3 | 3.4 | 3.5 | 3.6 | 3.7 |
| Free Cash Flow (€B) | 1.1 | 1.2 | 1.3 | 1.4 | 1.5 |
Note: Forecasts based on our base case scenario.
Risks
Several risks could impact Nokia’s future performance. These include:
- Licensing Volatility: The unpredictable nature of patent licensing agreements can significantly impact Nokia’s revenue and profitability. The failure to secure favourable terms in future agreements could negatively affect the company’s financial performance.
- Margin Pressure: Intense competition in the telecommunications equipment market, coupled with rising input costs, poses a threat to Nokia’s margins.
- Geopolitical Risks: Trade disputes and geopolitical tensions could disrupt supply chains and limit access to key markets.
- Technological Disruption: Rapid technological advancements in the telecommunications industry necessitate continuous innovation. Failure to adapt to these changes could erode Nokia’s competitive position.
Recommendation
Considering the balanced perspective of potential upsides and substantial risks, we initiate coverage of Nokia with a Hold rating. We believe the current share price adequately reflects the company’s near-term prospects and the uncertainties surrounding its licensing business. We recommend investors closely monitor the company’s progress in securing new licensing agreements, improving operational efficiency, and navigating the evolving technological landscape. We will revisit our rating and price target based on the company’s future performance and market developments.
Citations
1 Telecom Equipment Market Size is Projected to Reach 661.68 Billion by 2028 – Vantage Market Research
