Tech Buy Alert: Is Motorola Solutions (MSI) Poised for Massive Growth Ahead?


Motorola Solutions, Inc. (MSI) was once the market leader in cellular phones, from analog phones to digital phones such as the Motorola Razr. Motorola’s market share peaked in 2006 when market intelligence firm IDC placed it in a second position behind Nokia Oyj (NOK).

However, like many of its peers, the electronics manufacturer lost ground to smartphones from companies, including Apple Inc. (AAPL), Samsung, and several Chinese brands. Critics point to Motorola’s slow reaction to evolving consumer needs as the primary reason behind its downfall.

In 2010, Motorola was split into two companies: Motorola Mobility, which housed the company’s consumer electronics division, and Motorola Solutions, which manufactures telecommunications equipment. Google bought Motorola for around $12.50 billion in August 2011, and three years later, it offloaded to China-based tech company Lenovo for just $2.90 billion.

Now, Lenovo, the world’s largest personal computer maker, which acquired Motorola Mobility from Google in 2014, believes that the brand is all set for a major comeback. In recent years, Lenovo has sought to uplift the brand and position it as a higher-end smartphone player to compete with industry leaders like Apple and Samsung.

“I would bet a paycheck that in three years we will be number three around the world,” Matthew Zielinski, president of international markets at Lenovo, told CNBC at the World Economic Forum in Davos, Switzerland. Lenovo has turned around the Motorola business and “hyper-prioritized” it, a decision that is now paying off, he added.

This statement underscores Lenovo’s ambitious vision for Motorola’s position in the competitive landscape of the global smartphone market.

At present, Apple and Samsung are the top two brands in the smartphone market. According to the recent report from IDC, Apple grabbed first place in 2023 with a record-high market share of 20.1%, followed by Samsung at 19.4% market share. Two Chinese brands, Xiaomi Corp (XIACF) and Oppo, come in third and fourth place at 12.5% and 8.8%, respectively.

Counterpoint Research, another market intelligence firm, placed Samsung in first place with a 20% market share, as per data up to the third quarter of 2023. Apple comes in second with 16%, followed by Oppo and Xiaomi.

While the firm did not list Motorola in the top five, it did note that the brand reported double-digit growth last year. Motorola and Lenovo combined had about a 4% market share in the third quarter, making it the eighth-largest player worldwide. But Motorola might be doing well in individual markets. It came in second in Latin America, as per publicly available data from Canalys and Counterpoint.

Motorola is the third biggest smartphone maker by market share in the U.S., according to Counterpoint.

Currently, Motorola is banking on foldable smartphones, bringing back its Razr brand in the game. The latest version of the Motorola RAZR costs less than $1000, making it far more affordable than Samsung’s foldable offering.

Zielinski characterized the launch of the Razr foldable smartphone as a strategic move, describing it as “taking a stab at the premium market.”

MSI’s stock has shown rising strength, with more than 28% gains over the past year. Moreover, the stock has surged nearly 6% over the past month and more than 11% over the past six months.

Now, let’s discuss several other factors that could influence MSI’s performance in the near term:

Positive Recent Developments

On December 18, 2023, MSI acquired IPVideo, the creator of the HALO Smart Sensor, an all-in-one intelligent sensor that detects real-time health and safety threats. This acquisition reinforces Motorola Solutions’ commitment to enhancing safety and security by offering a cost-effective sensor that is easy and convenient to deploy and operate for enterprises of all sizes.

On November 28, MSI introduced the LTE-enabled V500 body camera, the newest addition to the company’s mobile video portfolio that brings critical real-time field intelligence to emergency response. Along with other of the Motorola Solutions mobile video portfolio, the V500 body camera uses the VideoManager evidence management software.

In addition, the V500 integrates with Motorola Solutions’ ecosystem of technologies, from radio and in-car video systems to control room solutions and Holster Aware Bluetooth sensors. These new product offerings are expected to extend MSI’s market reach and drive its profitability.

Robust Capital Deployment

On November 16, MSI’s Board of Directors raised its regular dividend by 11% to $0.98 per share. The quarterly dividend was paid in cash on January 12, 2024, to shareholders of record at the close of business on December 15, 2023.

The company pays a regular annual dividend of $3.92, translating to a yield of 1.19% at the current share price. Its four-year average dividend yield is 1.35%. Moreover, MSI’s dividend payouts have increased at a CAGR of 11.2% over the past three years. Motorola has raised its dividends for 11 consecutive years.

Additionally, MSI’s Board of Directors approved a $2 billion increase to the share repurchase program, raising the total authorization since July 2011 to $18 billion, with no expiration date for the program. Under its previously authorized $16 billion share repurchase program, nearly $599 million in repurchase authority remained at the end of the third quarter of 2023.

Robust Last Reported Financials

For the third quarter that ended on September 30, 2023, MSI reported net sales of $2.52 billion, surpassing analysts’ estimate of $2.52 billion. That compared to the revenue of $2.37 billion in the same quarter of 2022.

The Product and Systems Integration segment rose 5% year-over-year, driven by growth in land mobile radio communications (LMR) and video security and access control (Video). The Software and Services segment grew 12%, driven by growth in the command center, LMR, and Video.

Motorola ended the quarter with a record third-quarter backlog of $14.30 billion, an increase of 6% from the prior year’s quarter, inclusive of $321 million of favorable currency rates.

The company’s non-GAAP operating earnings rose 9.6% year-over-year to $741 million. Also, non-GAAP net earnings attributable to MSI grew 6.4% from the year-ago value to $547 million. The company posted earnings per share of $3.19, compared to the consensus estimate of $3.03, and up 6% year-over-year.

MSI’s cash inflows from operating activities were $714 million, an increase of 84% from the previous year’s period. The company’s free cash flow increased 104.1% year-over-year to $649 million.

Upbeat Business Outlook

“Q3 was another strong quarter, with record third-quarter revenue, earnings and cash flow,” said Greg Brown, chairman and CEO of Motorola Solutions. “Safety and security have never been more important and we continue to see robust demand which drove our record Q3 backlog. As a result, we’re again raising our revenue and earnings expectations for the full year.”

For the fourth quarter of 2023, the company expects revenue growth of nearly 4% year-over-year. MSI also anticipates non-GAAP EPS in the range of $3.65 per share.

For the full year 2023, Motorola expects revenue in the range of $9.93 billion to $9.95 billion, an increase from its previous guidance of $9.975 billion to $9.90 billion. The company’s non-GAAP EPS is expected to be between $11.65 and $11.70 per share, up from its prior guidance of $11.40-$11.48 per share.

Impressive Historical Growth

MSI’s revenue and EBITDA grew at respective CAGRs of 9.4% and 12.3% over the past three years. Its EBIT increased at a CAGR of 15.4% over the same period. Moreover, the company’s earnings from continued operations improved at a CAGR of 24.7% over the same time frame.

Furthermore, the company’s net income and EPS increased at CAGRs of 29.7% and 30.3% over the same period, respectively, while its levered free cash flow improved at a CAGR of 8.7%.

Favorable Analyst Estimates

Analysts expect MSI’s revenue for the fiscal year (ended December 2023) to grow 9.2% year-over-year to $9.95 billion. The consensus EPS estimate of $11.71 for the same period indicates a 13.1% year-over-year increase. Moreover, the company has surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is remarkable.

For the fiscal year 2024, the company’s revenue and EPS are expected to increase 5.7% and 8.2% year-over-year to $10.51 billion and $12.67, respectively.

High Profitability

MSI’s trailing-12-month EBIT margin and net income margin of 24.74% and 17.30% are considerably higher than the respective industry averages of 4.88% and 2.04%. Likewise, the stock’s trailing-12-month EBITDA margin of 28.60% is 204% higher than the industry average of 9.41%.

Furthermore, the stock’s trailing-12-month ROTC and ROTA of 23.62% and 13.69% are significantly higher than the industry averages of 2.70% and 0.55%, respectively. Its trailing-12-month levered FCF margin of 16.65% is 89.3% higher than the industry average of 8.79%.

Bottom Line

MSI’s revenue and EPS topped analysts’ estimates in the third quarter of fiscal 2023. As a result of record third-quarter sales, earnings, cash flow, and backlog, the company raised its financial expectations for the full year. Also, analysts appear bullish about Motorola’s outlook, driven by strong demand for its innovative offerings, strategic acquisitions, and investments.

Furthermore, Motorola’s Board of Directors recently increased its quarterly dividend and approved a $2 billion increase in the stock repurchase program, reflecting the company’s robust shareholder return strategy.

Now, Lenovo believes the brand is poised for a big comeback. The Chinese tech company foresees Motorola emerging as the world’s third-largest mobile brand by 2027. Last year, the company unveiled its foldable, the Motorola RAZR, which has the potential to compete with industry leaders like Samsung with its innovative features and affordable pricing.

Moreover, smartphone recovery this year could be beneficial for Motorola. Canalys forecasts smartphone shipments to reach 1.17 billion units in 2024, up 4% from last year.

Given these factors, MSI could be a wise investment now.

NOK's Struggles Unveiled: Analyzing the Impact of AT&T's $14 Billion Snub

In December, Swedish telecommunications giant Ericsson (ERIC) won a $14 billion contract to revamp AT&T Inc.’s (T) wireless network, outpacing long-time competitor Nokia Oyj (NOK).

Within the agreement, Ericsson is expected to construct an open network capable of obtaining supply from multiple vendors, signifying a pivotal industrial transition. The conditions of the contract permit T to freely select its antenna and infrastructure suppliers going forward, mitigating the inflexibility of a single-vendor lock-in. The allocated budget will span over five years, with the primary aim of enhancing T's 5G technology infrastructure.

Ericsson currently supplies two-thirds of T's network, while NOK caters to the remaining portion. T's choice dealt a significant blow to NOK, whose shares took a harrowing 10% dip on the Helsinki stock exchange following the announcement.

NOK maintains a comprehensive partnership with T, supplying products and services across wireless, wireline, and other network technologies. This mirrors NOK's similar collaborations with other major network operators in North America.

Analysts caution that setbacks faced by NOK could compel the firm to divest sections of its business. These segments might operate more efficiently under local entities that possess superior proficiency in maneuvering through the vast U.S. market. This prediction arises from worries that interpersonal issues undermined NOK's previous bid.

Danske Bank analyst Sami Sarkamies said, "We don't think the decision came down to nitty-gritty product features such as fan-based cooling, rather it has been more about top-level relationships, credibility, and corporate image in the eyes of the customer."

The transition to open-source technology is set to expose NOK to intensified competition from its competitors in the lucrative U.S. marketplace, an area currently recognized as the globe's most valued telecom market. The largest expenditure in this territory is by T.

The contract with T now grants Ericsson a critical early-adopter lead over its adversaries. The Swedish corporation pioneers as the inaugural globally recognized vendor to integrate open RAN with a major operator into an existing network.

Citi analyst Andrew Gardiner said, "Nokia had been the primary share gainer within the RAN market for the past two years, following the decline after it lost significant share at Verizon in 2019. The loss of share at a second North American customer, particularly given Nokia's legacy in that market, is a considerable blow."

In light of T’s plans to undertake an O-RAN deployment, co-working with other vendors for the coming five years, NOK anticipates a decline in revenue generated from T in the Mobile Networks section for the next two to three years. As of 2023, T accounted for approximately 5% to 8% of the net sales within Mobile Networks.

In response to the anticipated change in revenue, NOK aims to reduce its gross cost basis by between €800 million and €1.20 billion by the end of 2026 compared to 2023, assuming consistent variable pay during both periods. This ambitious target equates to a 10% to 15% reduction in personnel expenses.

NOK has put forth an aggressive strategy to implement this program swiftly, with plans in place to save at least €400 million within 2024 and a further €300 million in 2025. The effects of this cost-cutting endeavor could result in a leaner organization consisting of around 72,000 to 77,000 employees, compared to the current strength of 86,000 employees.

The action to reduce the cost base is expected to mitigate the impact of T’s decision partially. NOK expects Mobile Networks to remain profitable over the coming years, but this decision would delay the timeline of achieving a double-digit operating margin by up to two years.

Consequently, by 2026, the Finnish telecom equipment provider NOK anticipates a 13% dip in its overall comparable operating margin target from the prior estimation of at least 14%.

NOK's Mobile Network division is witnessing a declining trend in 2023, expecting the market environment for this segment to remain bearish in the near future. This anticipated weakness in Mobile Networks is predicted to impact NOK’s operating profits negatively.

Challenges also extend to 5G deployment slowdowns in India. While 5G technology boasts transformative potentials like rapid video downloads and high-speed autonomous vehicles, NOK has encountered investment deceleration from mobile network operators this year due to global economic downturns.

NOK had initially envisioned its 5G rollout in India as compensation for North American telecom operators' mitigated spending this year. However, reality fell short of these expectations.

Moreover, in the fiscal third-quarter report, NOK reported a 20.2% year-over-year decline in sales, reaching €4.98 billion ($5.49 billion) and a sharp 69% drop in profits, totaling €133 million ($146.65 million). These weaker-than-expected figures may potentially incite the telecom titan to decrease its workforce by approximately 14,000 personnel.

However, NOK is implementing various strategies to enhance the resilience of its operations and augment profitability. It also aims to capitalize on rapidly growing markets like Cloud RAN, O-RAN, Enterprise, and Defense.

By 2024, NOK projects a modest increase in revenue generated from its Cloud and Network services, which is anticipated to be driven by the stable rollout of 5G core technology and solid performance in the enterprise sector. The company is prioritizing the integration of SaaS and Network as Code solutions to fortify its business model. Its commitment to digital operations, AI, analytics, security, private wireless, and 5G core technologies will likely escalate its prospects.

In addition, NOK also foresees mid-single-digit growth in net sales accompanied by a consistent operating profit in their Infrastructure division for 2024. This positive trajectory is upheld by impressive performance in optical networks and secure enterprise agreements relating to IP networks.

The injection of government funding expected in the latter half of 2024 will likely stimulate a revival in fixed networks. With these favorable conditions, the Network Infrastructure division is projected to achieve an operating margin ranging between 12% and 15% by fiscal 2026.

In Mobile Networks, NOK is confident about outpacing market growth in 2026, with a comparable operating margin expected between 6% and 9%. The company has reaffirmed its revenue guidance, with a forecast indicating growth exceeding the average market rate in 2026. Moreover, the projected free cash flow remains unchanged and is anticipated to convert 55% to 85% from the comparable operating profit.

Analysts expect NOK’s revenue and EPS for the current fiscal year ending December 2023 to decline 6.4% and 21.9% year-over-year to $25.39 billion and $0.37, respectively.

Bottom Line

NOK’s diverse business segments cater to separate customer demographics with specialized research and development needs, susceptibility to market shifts, and variable target profit margins. To foster growth and strategic agility, NOK plans to accord greater autonomy to its business units in terms of investment choices, growth schemas, portfolio supervision, and strategic affiliations.

In addition to refining its operating model, NOK intends to share cash flow and area-specific sales data for every business group. This increased transparency will offer investors a more detailed understanding of the financial performance of each segment.

Despite the recent developments being less than positive, NOK's Mobile Networks sector has achieved notable progression in the past years, expanding its RAN market share and reinforcing technological advantages.

Management remains confident that the company possesses an apt strategy to generate shareholder value in the future through opportunities to increase market share, diversify operations, and enhance profitability.

Mobile Networks play an indispensable role in envisioning a universally connected future. Significant investments are necessary for networks with exponentially improved capacities to realize potential revolutions in cloud computing and artificial intelligence. Undeterred, NOK continues to finance its research and development initiatives and fabricate superior products for its clientele.

Moreover, NOK has garnered a significant advantage by inking several noteworthy contracts. The most significant among these is a contract with Deutsche Telekom, Europe's leading telecommunications operator and the primary stakeholder of T-Mobile USA. This strategic move marks a turning point for NOK, re-establishing its partnership with Deutsche Telekom after a lapse since 2017. As part of this renegotiation, notably, Ericsson failed to secure its participation, positioning NOK as the exclusive contractor.

NOK’s valuation appears reasonable, with the stock trading at 9x consensus 2023 earnings and 8.8x 2024 earnings, which could entice investors to allocate their funds to the stock.

However, investors should take note that NOK shares demonstrated an underwhelming performance throughout 2023, exhibiting a roughly 27% decline year-to-date, in glaring contrast with the broader S&P 500's gain of about 24% within the same period.

The shares, currently trading below their 50-,100-, and 200-day moving averages, have mostly been traded below the $5 mark.

The difficulty beleaguering NOK shares, however, lies in the lack of potential growth, especially as estimates continue to dwindle. This will perpetuate the scenario where shares remain in a value trap, mirroring the trend experienced in 2023.

Considering the overall scenario, it would be wise for investors to wait for a better entry point in the stock.