Nokia Corporation (NOK) is a Finland-based company that is engaged in the network and Internet protocol (IP) infrastructure, software, and related services market. The company’s networks segment comprises Mobile Access, Fixed Access, IP Routing, and Optical Networks businesses. NOK serves communications service providers, governments, large enterprises, and consumers.
Ubiquiti Inc. (UI) provides various networking products and solutions for service providers and enterprises worldwide. The company offers radios, antennas, and management tools that have been designed to deliver carrier class performance for wireless networking and other applications in the unlicensed radio frequency realm.
Because businesses are still adopting hybrid-working models even as the effects of the COVID-19 pandemic begin to diminish, the demand for cloud-based business solutions and networking has been rising. The heightened need for secure and improved networking solutions with the commercial deployment of 5G network is also driving the growth of networking companies. As a result, the global Network-as-a-Service market is expected to grow at a 33.1% CAGR over the next five years to reach $45.03 billion by 2026.
While NOK gained 31.6% over the past year, UI surged 67.4%. In terms of their past month’s performance, NOK is a clear winner with 22.9% gains versus UI’s 6% returns. But which of these stocks is a better pick now? Let’s find out.
Latest Movements
Today, NOK and DELTA Fiber, a Netherlands-based telecom company, signed a deal to offer 10 Gb/s broadband in the Dutch market. Combining NOK’s Software Defined Access Network (SDAN) technology with Microsoft Corporation’s (MSFT) Microsoft Azure cloud-based services and NOK’s developer ecosystem should help DELTA provide the fastest network across the country just as people are continuing to adopt hybrid-working models.
NOK announced its collaboration with systems integrator NetNordic today to deliver a private 4G and 5G-ready solution for the international operations of Equinor, one of the world’s leading producers of oil, gas and wind power. Forming an eight-year agreement with Equinor, both NOK and NetNordic are expected to provide a secure and resilient solution to support collaboration between teams across Equinor’s installations.
The Law Offices of Vincent Wong commenced a class action lawsuit against UI today. The company faces charges regarding alleged downplaying of a data breach in January 2021. Various law firms have been filing class action lawsuits against UI over the past couple of months.
Recent Financial Results
NOK’s net sales for the first quarter, ended March 31, 2021, increased 3.3% year-over-year to €5.08 billion ($6.19 billion). The company’s gross profit came in at €1.93 billion ($2.35 billion), up 10.9% from the prior-year period. Its operating profit came in at €431 million ($526.12 million), compared to a loss of €76 million ($92.77 million) in the first quarter of 2020. Its net profit is reported at €263 million ($321.05 million), compared to a loss of €115 million ($140.38 million) in the prior-year period. And its EPS came in at €0.05, compared to a loss per share of €0.02 in the year-ago period. The company had cash and cash equivalents of €7.32 billion, as of March 31, 2021.
For its fiscal 2021 third quarter, ended March 31, 2021, UI’s revenues have increased 38.5% year-over-year to $467.24 million. The company’s gross profit increased 39.5% year-over-year to $222.74 million. Its income from operations came in at $179 million for the quarter, up 40.5% from the prior-year period. While its non-GAAP net income decreased 8.9% year-over-year to $144.79 million, its non-GAAP EPS decreased 9.1% year-over-year to $2.30. The company had $2.09 million in cash and cash equivalents as of February 28, 2021.
Past and Expected Financial Performance
NOK’s EBIT and levered free cash flow grew at CAGRs of 19.8% and 26.5%, respectively, over the past three years. The company’s total assets have declined at a 2.1% CAGR over the past three years.
Analysts expect NOK’s revenue to increase 4.5% year-over-year for the second quarter (ending June 30, 2021), marginally in the current year ending December 2021, and 2.1% next year. Its EPS is expected to decline by 30.9% year-over-year for the second quarter, but then increase 11% for the current year, and 8.4% next year. NOK’s EPS is expected to grow at a 16.5% rate per annum over the next five years.
In comparison, UI’s EBIT and levered free cash flow grew at CAGRs of 29.8% and 25.1%, respectively, over the past three years. The company’s total assets have fallen at a 5% CAGR over the past three years.
Analysts expect UI’s revenue to rise 53.3% in the fiscal fourth quarter (ending June 30, 2021), 48.2% in the current year ending June 2021, and then decline 8% in the next year, ending June 2022. Its EPS is expected to increase 60.3% in the fourth quarter, 62.9% in the current year, and then decline 8% next year. However, its EPS is expected to grow at a 23.9% rate per annum over the next five years.
Profitability
NOK’s trailing-12-month revenue is 14.8 times UI’s. But UI is more profitable, with a 48% gross profit margin compared to NOK’s 39.9%.
Also, UI's 26.3% levered free cash flow compares well with NOK's 13%.
Valuation
In terms of non-GAAP forward P/E, UI is currently trading at 31.31x, 76.6% higher than NOK’s 17.73x. UI’s 29.46x forward EV/EBITDA is significantly higher than NOK’s 7.78x.
Also, in terms of forward EV/Sales, NOK’s 0.99x is 923.2% lower than UI’s 10.13x.
Thus, NOK is more affordable here.
POWR Ratings
While UI has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system, NOK has an overall B rating, which equates to Buy. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
NOK has an A grade for Growth. This is justified because the company’s operating cash flows increased 130.5% year-over-year. However, UI has a C grade for Growth. This is justified because the company’s total assets declined at a 5% CAGR over the past three years.
In terms of Value Grade, NOK has been graded a B, given its lower-than-industry valuation. The company’s 0.99x forward EV/Sales is 76.8% lower than the 4.25x industry average. UI, in comparison, has a Value Grade of D, in sync with the company’s 10.13x forward EV/Sales, which is 138.6% higher than the 4.25x industry average.
Out of 55 stocks in the B-rated Technology - Communication/Networking industry, UI is ranked #33 and NOK is ranked #10.
Beyond what we’ve stated above, we have also rated both NOK and UI for Stability, Sentiment and Quality. Get all NOK ratings here. Also, click here to see the additional POWR Ratings for UI.
The Winner
The rising demand for secure and improved network connectivity should accelerate the growth of the networking industry. Impressive profit margins and global market reach position both NOK and UI well to capitalize on the industry tailwinds. However, NOK appears to be a better buy based on its relatively lower valuation and superior analyst sentiment.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology - Communication/Networking industry.
NOK shares rose $0.01 (+0.19%) in after-hours trading Tuesday. Year-to-date, NOK has gained 32.74%, versus a 12.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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