Nokia Corporation (NOK) is a Finland-based company that does business 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 individual consumers.
Extreme Networks, Inc. (EXTR) provides wired and wireless network infrastructure equipment, software, and services for enterprises, data centers, and service providers. The company markets its products to business, governmental, healthcare, service provider and educational customers, with a focus on corporate enterprises and metropolitan service providers worldwide.
Because most businesses adopted cloud-based solutions during the pandemic, the demand for networking has increased over the past year. Efficient and secure solutions delivered to customers at optimized costs have enabled established networking companies to generate significant revenues and expanded their market reach. Companies in this industry are striving to develop innovative and efficient solutions to capitalize on heightened demand born from rising cybersecurity threats and expending 5G technology. The global Enterprise Network Equipment market is expected to grow at a 3.7% CAGR over the next five years to reach $72.17 billion by 2026.
While NOK gained 34% over the past year, EXTR surged 250.6%. In terms of their past month’s performance, NOK is a clear winner with 20% gains versus EXTR’s 17.8% returns. But, which of these stocks is a better pick now? Let’s find out.
Click here to checkout our 5G Industry Report for 2021
Latest Movements
Net4Mobility, a joint venture between Tele2 and Telenor mobile operators, selected NOK on May 19 to roll out commercial 5G services across significant areas of Sweden in a five-year deal. NOK will supply equipment from its comprehensive AirScale portfolio to help Net4Mobility deliver game-changing, ultra-high-speed, low-latency, and highly secure 5G connectivity to its subscribers. This deal demonstrates NOK continued momentum for both radio and 5G across Scandinavia and the Baltic region.
On May 18, NOK announced a deal to supply its digital operations software, cloud infrastructure software and AirFrame servers to help PLDT, a Philippines-based telecommunications company, and its wireless unit, Smart Communications, transform nationwide networks and standardize virtualization environments. With the help of NOK’s solutions, PLDT and Smart will reduce operating costs and increase customer satisfaction by automating service, network and cloud operations. Its success should result in a long-term partnership with NOK.
In partnership with DWE ICT, on May 17 EXTR deployed a cloud-managed Wi-Fi 6 network for Hard Rock Hotel Amsterdam American. Located at a historic site, Hard Rock Hotel Amsterdam American will now be able to deliver faster connectivity across the hotel's premises, enabling secure, reliable Wi-Fi access for guests, as well as simplified network management for the hotel's IT team. This deployment has improved performance through the facility and is likely to create a long-term partnership among these companies.
On April 7, Cordaan, a Netherlands-based healthcare provider, deployed ETR’s clinical-grade, cloud-driven networking solutions to optimize operating efficiency, bolster security, and meet increased connectivity demands from people and connected medical devices. As the only cloud-networking vendor with three ISO certifications, EXTR hopes to deliver efficient and secure solutions with optimized costs across Cordon’s network at 120 locations.
Recent Financial Results
NOK’s net sales for its fiscal year 2021 first quarter, ended March 31, 2021, increased 3.3% year-over-year to €5.08 billion ($6.18 billion). The company’s gross profit came in at €1.93 billion ($2.34 billion), up 10.9% from the prior-year period. Its operating profit came in at €431 million ($525 million), compared to a €76 million ($92.57 million) loss in the first quarter of 2020. Its net profit is reported at €263 million ($320.34 million), compared to a loss of €115 million ($140.07 million) in the prior-year period. And its loss per share came in at €0.05, compared to a loss of €0.02 in the year-ago period.
For its fiscal year 2021 third quarter, ended March 31, 2021, EXTR’s total net revenues increased 20.9% year-over-year to $253.40 million. The company’s non-GAAP gross profit has increased 31.4% year-over-year to $155.95 million. Its non-GAAP operating income came in at $28.61 million for the quarter, compared to an operating loss of $10.63 million in the third quarter of 2020. Its non-GAAP net income came in at $20.67 million, compared to a net loss of $11.24 in the prior-year period. Its non-GAAP EPS was $0.16, compared to a $0.09 loss per share in the year-ago period.
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 revenue has declined marginally over the past three years.
Analysts expect NOK’s revenue to increase 4.5% year-over-year for the fiscal 2021 second quarter (ending June 30, 2021), marginally in the current year and 2.1% in 2022. 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 rate of 16.5% per annum over the next five years.
In comparison, EXTR’s revenue and levered free cash flow grew at CAGRs of 2.3% and 35.3%, respectively, over the past three years. The company’s EBIT has declined at a 20.9% CAGR over the past three years.
Analysts expect EXTR’s revenue to rise 22.8% in its fiscal year 2021 fourth quarter (ending June 30, 2021), 5.1% in the current year, and 7.4% next year. Its EPS is expected to increase 494.4% in the fourth quarter, 455% in the current year, and 34.5% next year. However, its EPS is expected to fall at a 20% rate per annum over the next five years.
Profitability
NOK's trailing-12-month revenue is 27.3 times EXTR’s. However, EXTR is more profitable, with a 58.3% gross profit margin compared to NOK’s 39.9%.
However, NOK’s ROA and ROTC values of 3.6% and 6.5%, respectively, compare with EXTR’s 1.3% and 2.6%.
Valuation
In terms of non-GAAP forward P/E, EXTR is currently trading at 20.47x, 18% higher than NOK’s 17.35x. And EXTR’s 12.67x forward EV/EBITDA is significantly higher than NOK’s 7.70x.
But, in terms of forward non-GAAP PEG, NOK’s 2.08x is 103.9% higher than EXTR’s 1.02x.
POWR Ratings
Both NOK and EXTR have an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, each weighted to an optimal degree.
Both stocks have a C grade for Momentum, which is justified by their mixed price performance over the past year. In terms of Sentiment, NOK has been graded an A, which is in sync with the company’s revenues and earnings growth potential expected by analysts. In comparison, EXTR’s Sentiment Grade of C reflects relatively weak EPS and revenue growth expectations.
Also, NOK has an A grade for Growth, which is in sync with its 130.5% year-over-year rise on operating cash flow and is 485.4% higher than the industry average. However, EXTR’s B grade is justified by its year-over-year operating cash flow growth of 83.5%, which is 274.5% higher than the 22.3% industry average.
Out of 55 stocks in the B-rated Technology - Communication/Networking industry, NOK is ranked #8 and EXTR is ranked #2.
Beyond what we’ve stated above, our POWR Ratings system has also rated both NOK and EXTR for Value, Stability, and Quality. Get all NOK ratings here. Also, click here to see the additional POWR Ratings for EXTR.
The Winner
The rising demand for improved connectivity across businesses indicates a positive outlook for the networking industry. Both NOK and EXTR’s latest developments make them well-positioned to capitalize on the industry tailwinds. However, NOK appears to be a better buy based on its reasonable valuation, higher expected growth in financials and superior profitability.
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.
Click here to checkout our Cybersecurity Industry Report for 2021
NOK shares were trading at $5.08 per share on Monday morning, up $0.03 (+0.59%). Year-to-date, NOK has gained 29.92%, versus a 12.14% 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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