With Nokia It Feels Like "2 Steps Forward, 1.9 Steps Back"

Nokia’s (NOK) share price is about the same as when I last wrote about this telecom equipment vendor, but there has been a fair bit of drama in between, with the shares going over $6.50 early in 2019 before a big sell-off into and through first quarter earnings. Along the way there have been optimistic sell-side pieces on the prospects for Nokia to benefit from Huawei’s troubles, but also some bearish pieces on Nokia’s tech roadmap relative to Ericsson (ERIC), concerns about whether Samsung could emerge as a more disruptive force, and whether Nokia will ever be able to execute on a consistent basis.

Of all those concerns, the execution issues concern me most, and first quarter results reminded everybody of just how consistently inconsistent this company has been. While I do think Nokia is relatively well-positioned in 5G and can look to gain some share on the back of Huawei’s troubles, the stock really needs a steady pace of financial improvement in the underlying business. Although I do think these shares could trade into the high single-digits if and when EBITDA margins move into the mid-teens and revenue growth picks up on 5G deployments, I think a fairer risk-weighted fair value range is in the $5.25 to $6.50 area for now.

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With Nokia It Feels Like "2 Steps Forward, 1.9 Steps Back"

Ciena Executing Well On Growing Opportunities In Telco And Data Centers

Ciena (CIEN) has been one of my preferred names whenever Wall Street skepticism starts ramping up and undermining the price, and the shares have chopped their way almost 50% higher over the past year and 70% over the past two years, handily outperforming rivals like Acacia (ACIA), Infinera (INFN), and Nokia (NOK) over those time periods. While I do think the valuation today is more demanding, or at least more reflective of Ciena’s strong execution and growing end-market opportunities, the share price isn’t unreasonable and this is absolutely a name to consider on pullbacks.

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Ciena Executing Well On Growing Opportunities In Telco And Data Centers

Ciena Doing Its Part To Ease The Street's Concerns About The Growth Story

A handful of “surely the good times can’t last” downgrades pressured Ciena’s (CIEN) share price in late September, but the stock has since come back on renewed confidence that those good times actually can last a bit longer, as Ciena continues to gain share in optical systems and gain traction with its new offerings. Moreover, if the software business really is on a better growth trajectory, it will answer some of the concerns about that business and offer another driver of growth over the next couple of years.

The set-up going into 2019 isn’t perfect. Obviously the markets are jittery. On a more company-specific basis, there’s still some risk of disruption from new product introductions from Acacia (ACIA) and Infinera (INFN), as well as risks from service provider budget priorities and a possible slowdown in datacenter growth. Those risks don’t really faze me on a mid-term basis, but could create some choppiness on a month-to-month or quarter-to-quarter basis. Ciena sits toward the low end of my upwardly-revised fair value range, and I’d consider prices in the low $30’s (or below) to be solid buying opportunities for a company with good ongoing leverage to both service provider and datacenter spending.

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Ciena Doing Its Part To Ease The Street's Concerns About The Growth Story

Ciena Sliding A Bit As The Sell-Side Rebuilds The Wall Of Worry

Ciena (CIEN) has been on a roll. Revenue rose 12% in the fiscal third quarter (beating expectations by 3%), gross margin was stronger than expected, and the company has been on a multiyear market-share-building run in both its core WDM market and in webscale. All of that has fueled a market-beating 33% run in the stock over the past year, so of course now some eager beavers on the sell-side are trying to beat the rush and downgrade early.

Wait, what?

It’s not all that uncommon to see calls that otherwise might look bold come out around this time, as there’s not much else to talk about in the weeks before third quarter earnings, and there are some near-term drivers that could weigh on Ciena’s growth. How management sets expectations coming out of this next quarter will clearly be important, as the run in the shares has somewhat emptied the tank for positive drivers.

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Ciena Sliding A Bit As The Sell-Side Rebuilds The Wall Of Worry

Ciena Converting Skeptics And Finding Its Groove

Ciena (CIEN) has been a patience-testing call at times, as the market has been unwilling to trust this optical equipment provider given a not-so-great history and reputation for its sector. While there are still too many subscale players in optical transport, Ciena is doing well on Tier 1 metro spending, growth overseas in markets like India and Japan, and data center growth. Margins are still a bit of a sensitive subject, but I think management has made a good case for why margins should rebound over time.

With the big post-earnings jump (up more than 10%), it's harder to call Ciena a bargain, though I don't think the upside is tapped out yet. I'm a little concerned that Ciena could disappoint on gross margins in the next quarter and shake some of this newly-won confidence, but this is definitely a name I'd look at again if it were to slide back into the mid-$20s.

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Ciena Converting Skeptics And Finding Its Groove

Nokia On The Edge Of The Ramp

The last few years haven’t been all that much fun for Nokia (NOK), or its shareholders, as this telecom equipment company found itself sandwiched between more aggressive competitors and more conservative customers, and stuck in a place where customers have scaled back investments in older network technology but haven’t yet started spending on 5G. Now, though, the company appears to be just at the starting edge of a ramp-up in network spending that should drive meaningful cash flow generation in the coming years.

I don’t believe 5G will be transformational for Nokia in the sense that the company will suddenly see breakout revenue growth, but I do believe the company’s end-to-end solution could drive some share and revenue upside. I also believe there could be more long-term opportunity in the optical networking and IP routing businesses from recently-introduced technologies. Given all of that, I think Nokia is worth considering into the $6’s.

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Nokia On The Edge Of The Ramp

Nokia Digging In Ahead Of 5G Deployments

Despite a sharp decline after troubling third-quarter earnings, Nokia (NOK) is more or less back where it was the last time I looked at this company, and now we’re all about six months closer to meaningful deployments of 5G equipment (likely to begin in 2018, ramp up in 2019, and really start getting meaningful in 2020). At the same time, the company still has worthwhile opportunities in “ancillary” markets like analytics/automation and enterprise webscale deployments.

Even with the boost that 5G deployments should provide, I do not believe Nokia will deliver all that much long-term growth. Sure, plenty of third-party sources quote figures in the hundreds of billions of dollars for “needed” investment in capacity, but that ignores the realities of the price pressures on companies like Nokia and Ericsson (ERIC), the rise of competitors like Huawei, and the “do more with less” innovations that allow providers to get more out of their installed base.

That doesn’t mean I’m negative on Nokia. I think the shares are still undervalued today, with a possibility that expectations for 5G deployments could improve with time, not to mention potential outperformance from technology licensing and non-traditional/ancillary markets.

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Nokia Digging In Ahead Of 5G Deployments

The Ciena Roller Coaster Is Back In The Buy Zone

I’ve warned before that Ciena (CIEN) really isn’t a great buy-and-hold stock (unless you have a lot of patience…), and the past few months have backed that up. While the shares did well after my last write-up and a strong second quarter, the shares started to weaken in July with growing concerns about the near-term growth outlook pushing the stock back below $20 for a time.

The outlook for optical in 2018 is not particularly strong, with expectations for basically no growth in long-haul and concerns in metro that Verizon (VZ) spending has already peaked. While Ciena still has some company-specific drivers like its datacenter interconnect business, its new WaveLogic Ai chipset, and its growing software business, this company has long struggled to regain credibility from the Street and confidence in management’s long-term goals for revenue and margins.

With the shares back down in the low $20’s, I’m more bullish on Ciena. I believe you have to be careful with cyclical stories (and the 100G rollout is a cyclical driver), but I believe Ciena has taken a lot of smart steps to improve and expand its business, and I believe long-term revenue growth in the 4% to 5% range is attainable, supporting a double-digit FCF growth rate and a mid-$20’s fair value if management can generate modest margin improvement from here.

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The Ciena Roller Coaster Is Back In The Buy Zone

Opportunities In 5G And New Services Don't Seem Fully Factored Into Nokia's Price

An open mind is a valuable asset in investing – in my own experience, it's hard not to start the research process without at least some preconceived notions (after all, something prompted you to start the process...), but keeping an open mind at least lets you respond to new information. That's relevant to me in the case of Nokia (NYSE:NOK), as I went in assuming it was not too likely that this very well-known networking equipment company would be undervalued as the market looks ahead to the start of the 5G rollout in a couple of years.

And yet, Nokia may still be worth a look. The shares are widely followed (around 30 sell-side analysts cover it), and the 5G story is no secret, but the market doesn't seem to think that Nokia will manage to get (or keep) better margins in the years to come despite good progress here since the Alcatel deal. These shares are down more than 10% over the past year and up only marginally in the last year, but breaking out into double-digit FCF margins again in four to five years would support a fair value at least 10% above today's price.

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Opportunities In 5G And New Services Don't Seem Fully Factored Into Nokia's Price

Ciena Continuing To Execute Well In A Growing, And Perhaps Changing, Optical Market

Ciena (NASDAQ:CIEN) has done alright since I last wrote about the stock, with the shares up around 8% versus a 10% gain in the S&P 500, a 9% gain in Nokia (NYSE:NOK), and a slight decline in Infinera (NASDAQ:INFN), but this optical player remains a controversial and volatile name. Nobody seems to dispute that Ciena today is a stronger company both financially and competitively than it has been in a long, long time (if not ever), but some analysts and investors are still reluctant to trust that the optical equipment market has really changed and that these good times can last.

I hate "it's different this time" stories because in the vast majority of cases, it really isn't different, and investors go away with singed eyebrows. That said, telco metro deployments seem less lumpy than in past cycles, and the industry has benefited from consolidation. What's more, data center interconnect is a meaningful growth opportunity, and traffic growth seems well-supported by growing use of streaming services and increased fiber-to-the-home deployments.

Given the trends in both telco and non-telco spending, I don't think my long-term revenue forecast of 5% for Ciena is ridiculous or even all that ambitious, though I do have some concerns that the actual "flight path" along that trend line will be choppy. I'm a little more nervous about modeling double-digit FCF margins on a sustained basis, but Ciena management does seem to have the company in better shape. All told, if Cisco can, in fact, deliver 10% long-term FCF growth, a fair value in the mid-$20s is reasonable, and the shares hold some appeal here.

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Ciena Continuing To Execute Well In A Growing, And Perhaps Changing, Optical Market

Seeking Alpha: Ciena: An Always-Volatile Play On Telecom And Data Center Spending

It seems like the only sure thing regarding Ciena (NYSE:CIEN) is that the shares of this optical networking equipment company will always be volatile. The shares have spent the last five years bouncing between the low teens and high $20s, with that range tightening up to $15 to $25 over the last couple of years. While the growth outlook for the company's 6500 and Waveserver platforms is strong on the basis of telecom/cable and data center spending expectations, Ciena has ample competition from the likes of Huawei, Infinera (NASDAQ:INFN), and Nokia (NYSE:NOK) and healthy margins and cash flows in this sector have never been particularly sustainable.

While Ciena's first quarter results and guidance weren't disastrous, they offer a reminder that the company's business is volatile and hard to predict, and that the Street seems to always hold these shares with one eye firmly fixed on the exit. A fair value in the low $20s and the potential to trade higher than that on "it's different this time!" enthusiasm if/when orders really start rolling in is a reason for more aggressive investors to consider the shares, but the volatility and the prospect of perpetually inadequate ROICs is going to be a bigger stumbling block for value/quality-oriented investors.

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Ciena: An Always-Volatile Play On Telecom And Data Center Spending

Seeking Alpha: Without A Buyer, TomTom's Route Is Unclear

When the best exit strategy for a stock is a buyout from a company that may not actually need the products or technology involved, it's tough for me to get all that excited. Be that as it may, the potential of a buyout has been the strongest bull argument for TomTom (OTCPK:TMOAY) (TOM2.AS) for over a year, as many have argued that Apple (AAPL) needs to, or at least should, acquire TomTom to secure its position in mapping and location technology.

There's little argument that mapping/location/navigation technology is important for smartphone manufacturers, and increasingly for automobile manufacturers as well. Whether its important enough for another company to shell out the more than the $1.6 billion it would likely take to acquire TomTom is debatable. The rise of "social mapping" is creating more technology options and the sale of Nokia's (NOK) handset business to Microsoft makes Nokia a more viable licensing partner. I'm not going to rule out the possibility of a company buying TomTom for its map assets, but the stock appears about 20% overvalued on its own independent merits and that makes this more of a binary story than I prefer.

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Without A Buyer, TomTom's Route Is Unclear

Investopedia: Nokia Sells Its Handset Business To Microsoft And Remakes Its Future

From virtually the day that Nokia (NYSE:NOK) and Microsoft (Nasdaq:MSFT) began working together on mobile handsets and smartphones investors have speculated whether Microsoft would acquire Nokia's handset business. Not only had Nokia continued to struggle with the transition to smartphones, some argued that Microsoft would want to “control its ecosystem” in the same way that Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) do through their software and hardware operations.

That all came home to roost on Tuesday, as the two companies announced a transformative deal that will see Microsoft acquire Nokia's phone business and license significant intellectual property (IP). After the deal, Nokia will be a cash-rich wireless infrastructure company, while Microsoft will be much more geared towards handsets and consumer devices.

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Investopedia: Another Bad Quarter Highlight's Microsoft's Growth-Vs-Value Problem

Just when you think you've found a fool-proof business, a better fool evolves to mess things up. I've long thought that Microsoft (Nasdaq:MSFT) shares seemed much too cheap, but held off on buying for fear that ongoing operational shortcomings would obscure that value. With a fiscal fourth quarter that was weak across almost every metric, it looks like that has come home to roost.

Although I think the base Windows, Office, and server/tools businesses are still valuable, it's increasingly difficult to trust management to adequately execute or communicate their plan. So while I still think these shares are too cheap on a cash flow basis, it's likely going to take something more dramatic than another reorganization or stabilization in the PC business to get these shares closer to fair value.

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Investopedia: Nokia Buys Out Siemens, Are Phones Now On The Block?

There was never really a question as to if Nokia (NYSE:NOK) and Siemens (NYSE:SI) would unwind their 50/50 partnership in Nokia Siemens Networks. Siemens had made it quite clear that they were considering all options for monetizing their stake and continuing their own plan to streamline operations. What's more, it was becoming increasingly clear that there was minimal third-party interest and that going the IPO route wasn't likely to realize full value. Curiously, though, Siemens has chosen to sell its stake in the venture to Nokia at a pretty undemanding valuation.

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Investopedia: BlackBerry Still Doesn't Get It

There's maybe no better example of the disconnect between the real world and the stock market than the near-tripling of BlackBerry's (Nasdaq:BBRY) stock price from the September lows of 2012 to the February highs of this year. This is a company that still doesn't appear to know how to handle investor relations, nor actually listen to what customers want and design their devices accordingly. The company's sizable cash balance gives management many additional bites at the cherry, but it's hard for me to see a reason to believe they'll execute on the turnaround opportunities in front of them.

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Investopedia: Will Chatter Around Samsung Shipments Spook Components Stocks?

One of the favorite games of sell side analysts covering the smartphone/mobile device sector is “Guess That Shipment Number”; using various channel checks and supplier interviews to project shipment numbers for phones from leading manufacturers like Apple (Nasdaq:AAPL) and Samsung Electronics (Nasdaq:SSNLF) and go to the buy-side with supposedly proprietary calls. This time it's Samsung's turn, and analyst downgrades tied to flagging sales of the Galaxy S4 have sent the stock down more than 6% in South Korea.

As Samsung Electronics trades only as an unsponsored ADR in the U.S. (and an illiquid one at that), the impact to stocks like Apple, Nokia (NYSE:NOK), and the component suppliers may be the more relevant factor to consider. While it would be very hasty to call these lower shipments (if the stories are true) the end of Samsung's smartphone boom, it's a good reminder that over-booking and product launch cycles introduce a lot of uncertainty into this sector.

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Investopedia: Are Market Factors Pushing Qualcomm Into The Penalty Box?

Financial writers often talk about overlooked or obscure stocks as though it's a bad thing to operate outside of the 24-7 glare of Wall Street attention. When it comes to stocks like Qualcomm (Nasdaq:QCOM), though, maybe a little obscurity would be a good thing. Although I can understand that investors are worried about the fundamental trends in the mobile device market, it seems like matters always get taken up a notch when it involves Qualcomm. To that end, while I wouldn't be surprised if this stock remains volatile through the summer (or the remainder of the year, for that matter), I think the underlying value here still makes it worth a look.

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Investopedia: The Defenestration Of Apple Continues

As I suggested back in January on this website, I thought Apple (Nasdaq:AAPL) could have further to fall as growth investors and fan-boys dove off the bandwagon in the wake of less-than-perfect execution. In that short space of time, the shares dropped about 20%, leading to a huge loss of shareholder wealth (at least on paper).

Apple is a curious stock to me now. I do believe that the stock is too cheap relative to what I see as the probable trajectory of revenue and cash flow. By the same token, I've been at this too long to underestimate the headwinds that a stock can face when a large base of shareholders becomes disenchanted with a story and moves on for greener pastures. I do believe that patient investors will do better than just okay in Apple shares from these levels, but investors buying in today have to accept at least the risk of a further over-correction on the downside before the shares start to perform again.

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Investopedia: Weak PC Growth And Slow Mobile Penetration Weighing On Microsoft

It really is too bad that the conversation on Microsoft (Nasdaq:MSFT) always seems to be dominated by what the company isn't. Bearish analysts and investors hammer the company for its heavy reliance on PCs and fault the company for letting Apple (Nasdaq:AAPL) and Google (Nasdaq:GOOG) build such a large lead in mobile operating systems, while also complaining about the company's relatively weak online business and below-average entertainment profitability.

Those are legitimate criticisms, but only to a point. It is not as though smartphones and tablets have replaced PCs in the office environment, nor are they likely to anytime soon. What's more, Microsoft has a bigger (and faster-growing) presence in enterprise software than is usually appreciated. Last- and by no means least, Microsoft remains an exceptionally profitable company that generates exceptionally large amounts of cash every year.

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