Headquartered in Espoo, Finland, Nokia Corporation (NOK) provides mobile and fixed network solutions worldwide. It operates through four segments: Mobile Networks, Network Infrastructure, Cloud and Network Services, and Nokia Technologies. In comparison, Motorola Solutions, Inc. (MSI) in Schaumburg, Ill., provides mission-critical communications and analytics internationally. The company operates through two segments: Products and Systems Integration, and Services.

Since the onset of the COVID-19 pandemic, communication equipment has been in high demand because the need for advanced technologies has increased with people spending most of their time indoors. While the semiconductor chip shortage and supply chain crisis, which have been exacerbated by the Russia-Ukraine war, remain concerns, communication equipment is expected to continue witnessing increasing demand in the cloud computing, 5G connectivity, and the internet of things (IoT) era. According to a Market Research Future report, the global telecom equipment market is expected to grow at an 11.23% CAGR  through 2025. So, both NOK and MSI should benefit.

NOK stock has gained 35.3% in price over the past year, while MSI has returned 26.2%. However, MSI’s 4.4% gains over the past month compare with NOK’s negative returns. Moreover, MSI is the clear winner with 7.8% gains versus NOK’s negative returns in terms of the past nine month’s performance.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On March 1, 2022, NOK announced the launch of its cloud-native solution, Adaptive Cloud Networking, to transform service provider cloud networks to be consumable, agile, and automated. This could lead to increasing demand for its solutions.

On March 23, 2022, MSI announced it had acquired TETRA Ireland Communications Limited, Ireland’s National Digital Radio Service provider. The acquisition further expands the company’s global managed & support services business.

Recent Financial Results

NOK’s net sales decreased 2% year-over-year to €6.41 billion ($7.04 billion) for the fourth quarter, ended Dec. 31, 2021. However, its profit for the period came in at €680 million ($746.08 million) compared to a €2.70 billion ($2.96 billion) loss in the prior-year quarter. Also, its EPS came in at €0.12 compared to a €0.48 loss in the year-ago period.

MSI’s sales increased 2% year-over-year to $2.32 billion for its fiscal fourth quarter, ended Dec.31, 2021. The company’s non-GAAP operating earnings came in at $670 million compared to $667 million in the prior-year quarter. However, its non-GAAP EPS came in at $2.85 compared to $2.86 in the year-ago period.

Past and Expected Financial Performance

NOK’s EBIT and levered FCF have grown at CAGRs of 21.5% and 1.1%, respectively, over the past three years. Analysts expect NOK’s revenue to increase 0.7% for the quarter ending March 31, 2022, and 2.9% in its fiscal 2023. The company’s EPS is expected to decline 2.3% in its fiscal year 2022 but grow 7% in fiscal 2023. And its EPS is expected to grow 14.8% per annum over the next five years.

In comparison, MSI’s EBIT and levered FCF have grown at CAGRs of 10.7% and 18.8%, respectively, over the past three years. The company’s revenue is expected to increase 3.3% for the quarter ending March 31, 2022, and 6.7% in fiscal 2023. Its EPS is expected to grow 7.9% in fiscal 2022 and 12% in its fiscal 2023. Also, MSI’s EPS is expected to grow at 14.3% per annum over the next five years.

Profitability

NOK’s trailing-12-month revenue is 3.10 times what MSI generates. However, MSI is more profitable, with gross profit and net income margins of 49.54% and 15.24%, respectively,  compared to NOK’s 39.97% and 7.31%.

Furthermore, MSI’s respective 11.29% and 23.12% ROA and ROTC are higher than NOK’s 3.27% and 5.91%.

Valuation

In terms of forward non-GAAP P/E, MSI is currently trading at 23.53x, which is 92.1% higher than NOK’s 12.25x. And MSI’s forward EV/EBITDA ratio of 16.69x is 154.4% higher than NOK’s 6.56x.

So, NOK is relatively affordable here.

POWR Ratings

NOK has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. In contrast, MSI has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

NOK has an A grade for Value, which is consistent with its 0.81x forward non-GAAP PEG, which is  47.6% lower than the 1.54x industry average.. However, MSI has a C grade for Value, which is in sync with its 3.92x forward non-GAAP PEG, which is 155% higher than the 1.54x industry average.

Among the 54 stocks in the Technology – Communication/Networking industry, NOK is ranked #12. In comparison, MSI is ranked #18.

Beyond what I have stated above, we have also rated the stocks for Growth, Quality, Stability, Momentum, and Sentiment. Click here to view all the NOK ratings. Also, get all the MSI ratings here.

The Winner

The communication equipment market is expected to grow significantly with increasing demand for advanced devices to facilitate hybrid working. While both NOK and MSI are expected to gain in the long run, we think it is better to bet on NOK now because of its lower valuation.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Technology – Communication/Networking industry here.

NOK shares were trading at $5.50 per share on Tuesday afternoon, up $0.11 (+2.04%). Year-to-date, NOK has declined -11.58%, versus a -2.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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