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Nokia Is Remaking Itself Into a 5G Leader. Now Might Be the Time to PlugIn to the Stock.

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Nokia unveiled a broad restructuring plan last March.

Roni Rekomaa/Bloomberg

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Nokia

has had a tough few years, but the Finnish telecom giant has successfully engineered the first part of its turnaround, and now is primed to gain market share in next-generation 5G networks.

After losing ground to Swedish rival


Ericsson

(ticker: ERIC.B.Sweden) and China’s Huawei early in the 5G network battle, Nokia (NOKIA.Finland) hit the reset button.

Shortly after taking charge in August 2020, CEO Pekka Lundmark unveiled a new strategy, streamlining Nokia into four business groups and promising to do “whatever it takes” to lead in the 5G space. Once a big producer of mobile handsets, Nokia now makes routers, network processors, and products for telecom infrastructure, including the 5G network, and also offers cloud services and solutions.

The company’s early struggles in the 5G rollout were partly to blame for profit warnings in 2019 and 2020. It was a tough period for the stock, which fell 49% from a January 2019 peak to 2.81 euros ($3.18) shortly after the strategy shift was announced in October 2020.

The company unveiled a wide-ranging restructuring last March, resetting its cost base to invest in 5G and cloud and digital infrastructure. Since then, Nokia has enjoyed a string of earnings beats, the latest of which came with the resumption of its quarterly dividend and the launch of a share-buyback program.

The stock has jumped 73% to €4.85 since its October 2020 lows but with the turnaround only just entering the growth phase, analysts see the stock having plenty of upside potential. Those covering the stock have an average target price of €6.18, implying a 28% upside to Monday’s closing price, according to FactSet.

“We have created an excellent foundation as we begin to move into the next phase of our strategy to deliver growth and expand profitability,” Lundmark said as the company reported fourth-quarter earnings earlier this month.

J.P. Morgan analysts, led by Sandeep Deshpande, shared those sentiments as they maintained a Buy rating on the stock. “We believe the company can now move to the next stage of taking share and growing more than the market,” the analysts said in a note. They have a price target of €6.50, implying a 27.7% gain from the Feb. 17 closing price, and rate Nokia’s U.S.-listed shares (NOK) Overweight with a price target of $7.80, which would be a 37% upside.

Nokia has set a long-term target to boost revenue faster than the market. Analysts expect the company to post sales of €23.3 billion this year and €23.7 billion in 2023, both beating revenue of €22.2 billion last year. But it’s the company’s new long-term target for operating margins of at least 14%, replacing an earlier 2023 target of 11% to 13%, that has grabbed the attention of analysts. “If one benchmarks the business to Ericsson, it could reach mid- to high-teen margins, in which case Nokia’s 14% operating margin guidance looks too cautious,” Deshpande said.

Société Générale analyst Aleksander Peterc, who rates the stock a Buy with a €6.70 price target, also says the margin guidance “appears conservative.” Peterc says the target was in step with management’s tendency to guide low and beat or upgrade later, which “will ultimately help rebuild Nokia’s credibility with investors.”

That problem of credibility with investors may explain why Nokia trades at 13.1 times future earnings, a 17% discount to its peer average. The substantial discount reflects Nokia’s multiple missed goals and profit warnings, Peterc says, adding that as the group’s turnaround remains solid, the valuation discount should narrow.

With Nokia’s turnaround set to kick in this year, and the opportunity for it to cement itself as a dominant player in the lucrative 5G space, it may be a good time for investors to plug into the stock.

Write to Callum Keown at callum.keown@dowjones.com

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