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Nokia‘s (NYSE:NOK) stock briefly hit a two-year high in late January due to a market-wide short squeeze that also lifted shares of GameStop, BlackBerry, and other beaten-down companies.

But Nokia’s gains were ephemeral, and the stock price remains down about 4% over the past 12 months. As that volatility ends, investors might be wondering if the Finnish telecom equipment maker is still a worthy investment. Let’s tune out the near-term noise and see where Nokia’s stock could be in a year.

Reviewing Nokia’s challenges

Nokia sold its mobile phone unit to Microsoft (NASDAQ:MSFT) in 2014, then purchased its rival Alcatel-Lucent in 2016 to expand its networks business, which provides telecom equipment and services to carriers.

Nokia CEO Pekka Lundmark. Image source: Nokia.

Nokia’s $16.6 billion acquisition of Alcatel-Lucent expanded its portfolio and increased its market share. However, Nokia focused too much on cutting costs as it integrated Alcatel-Lucent, which caused it to fall behind its rivals in 5G investments. It suspended its dividend in late 2019 to free up more cash to strengthen its 5G business, but the 11th-hour effort was too little and too late.

As a result, Nokia’s market share shrank as big wireless carriers upgraded their 5G networks. Between the end of 2019 and the third quarter of 2020, Nokia’s share of the global telecom equipment market fell from 16% to 15%, according to Dell’Oro Group — putting it in second place behind Huawei.

Huawei’s share rose from 28% to 30%, Ericsson‘s (NASDAQ:ERIC) share held steady at 14%, and ZTE‘s (OTC:ZTCOY) share increased from 9% to 11%. Chinese tech giants Huawei and ZTE both faced blacklists and sanctions, but they both offset their overseas losses with gains within China.

That’s probably why China Mobile, the country’s largest wireless carrier, dropped Nokia from its second round of 5G upgrades last year. But Ericsson, which streamlined its portfolio to focus more on selling radio access network gear, didn’t lose any major contracts in China.

A murky future

Nokia’s CEO Rajeev Suri resigned last July and was succeeded by Pekka Lundmark, who previously led the Finnish energy company Fortum.

Image source: Getty Images.

Nokia’s revenue fell 6% (and decreased 4% in constant currency terms) in 2020. But its gross and operating margins improved, and its adjusted earnings grew 18%.

By comparison, Ericsson’s revenue rose 2% (and grew 5% in constant currency terms) in 2020, its gross and operating margins also expanded, and its earnings jumped nearly eightfold.

Nokia mainly attributed its declines throughout 2020 to soft demand for its network deployment and planning services, which was only partly offset by higher demand for its 5G radio access products.

By region, Nokia’s double-digit revenue declines in the Latin America, Asia-Pacific, and Greater China regions offset its tepid growth in other markets. Nokia now excludes China from its 4G/5G market share calculations, which suggests it’s surrendering the market to Huawei, ZTE, and Ericsson.

In Nokia’s annual report, Lundmark said the company expects 2021 to be “challenging, a year of transition, with meaningful headwinds due to market share loss and price erosion in North America.” Lundmark also warned that Nokia would need to “make further 5G R&D investments in 2021” and “sacrifice some short-term margin” to stay competitive. Faced with those challenges, Nokia doesn’t plan to reinstate its dividend anytime soon.

Nokia expects its revenue to decline 0%-6% in 2021, with a comparable operating margin of 7%-10% — compared to 9.7% in 2020. Analysts expect its revenue and earnings to decline 2% and 23%, respectively, for the full year.

Ericsson is faring much better than Nokia. Analysts expect Ericsson’s revenue and earnings to rise 3% and 6%, respectively, in 2021. Ericsson also posted a much higher comparable operating margin of 12.5% in 2020, and it continues to pay its dividend.

Ericsson looks healthier than Nokia because it isn’t struggling with acquisition indigestion, it wisely ramped up its 5G investments at the right time, and it divested its weaker businesses. Those strengths put Ericsson in a better position to profit from the secular growth of the 5G market, and it might gain more business from former Huawei and ZTE customers in non-Chinese markets than Nokia.

2021 will be another rough year for Nokia

Nokia trades at about 17 times forward earnings, while Ericsson has a slightly higher forward P/E ratio of 20. But Nokia is cheaper for obvious reasons, and Ericsson’s strengths easily justify its higher multiple.

Investors should have sold Nokia when it popped in late January. Those who didn’t should expect another sluggish year as the company tries to keep pace with its better-run rivals in the competitive 5G market.