It’s difficult to categorize Nokia (NYSE:NOK) as anything but a disappointment. Nokia shares have lost two-thirds of their value over the past decade. Recent performance hasn’t been much better: NOK stock touched a 52-week low just last month.
The sense of disappointment goes beyond the stock price. This is a company that’s offered promise repeatedly in recent years, with multiple potential catalysts for growth. The sale of its phone business to Microsoft (NASDAQ:MSFT) in 2013 brought in over $7 billion in cash, which was supposed to allow the Finnish tech company to focus on its networking business. The acquisition of Alcatel-Lucent was a supposed game-changer in driving so-called end-to-end sales.
Nokia launched the Nokia 8 in 2017 to try and become a player in the smartphone business. It predicted the development of 5G wireless would be a significant driver for growth.
None of those catalysts have played out. Nokia stock continues to drift downward. Revenue rose 1% in constant currency last year. Adjusted earnings declined.
Nokia’s CEO seems to insist that this time is different — and he may be right. But investors would be wise to keep a skeptical attitude until he finally delivers on that promise.
5G and the Case for NOK Stock
History aside, there is an intriguing case for Nokia stock at the moment. NOK is cheap, at 13x 2020 EPS estimates. The company still has more than $2 billion in net cash on the balance sheet. And 5G development is on the way – with a major competitor potentially hamstrung.
Nokia CEO Rajeev Suri addressed the company’s 5G opportunity in an interview with Bloomberg this week. Suri said Nokia was competing well in 5G. China’s Huawei, which clearly has taken share from Nokia in recent years, has been a target of the U.S. government based on national security concerns. But Suri argued that even that aside, “we compete quite favorably with Huawei”.
As for Scandinavian rival Ericsson (NYSE:ERIC), Suri claimed that Nokia wins “two-thirds of the time” when going up against them. The end-to-end offering now account for roughly half the company’s pipeline of opportunities. Meanwhile, 5G demand continues to rise and Suri highlighted another opportunity in industrial IoT (Internet of Things). Suri’s figures suggest demand in that part of IoT may be a bigger benefit to Nokia than 5G.
Listening to Suri, it’s easy to believe that NOK stock might finally be ready to rise. The opportunities are real, and substantial. European countries aren’t putting the same pressure on Huawei as their U.S. counterparts, but the negative press surrounding that Chinese firm surely gives Nokia at least some sort of advantage. All told, Nokia looks ready to grow. At 13x earnings, Nokia stock isn’t priced as such.
Q1 Earnings and the Case Against Nokia Stock
There are two problems with the case here, however. The first is that Nokia’s first earnings were notably disappointing, leading NOK stock to drop 10%. And the second, again, is that Nokia has made promises before — and had opportunities on which to capitalize.
To be fair, Suri told Bloomberg that the company hadn’t yet recognized revenue from signed contracts — echoing commentary from Nokia after Q1. The company still sees significant 5G-related growth coming in the second half of the year.
But the company also admitted that full-year guidance would be tough to hit. And given the long-running credibility problems here, Nokia stock clearly has become a “show me” story. That’s why investors sold so quickly after Q1 numbers: the fear is that Nokia is going to disappoint again.
On the NOK Stock Sidelines
That risk colors the bull case for NOK stock, even at the lows. Networking is a tough business: even leader Cisco Systems (NASDAQ:CSCO) trades at just 16x forward earnings despite notably better results of late. Ericsson stock has been dead money for a decade. The same is true of Juniper Networks (NYSE:JNPR). Sure, 13x earnings for Nokia stock seems cheap … but it’s not amazingly so in the context of the sector.
Meanwhile, as intriguing as 5G appears, Nokia itself expects its addressable market to stay flat in 2019. Any revenue growth will have to come from market share gains and — despite Suri’s commentary and Huawei’s struggles — it’s tough to have confidence in Nokia’s ability to compete. It certainly hasn’t done so in recent years.
Nokia can prove skeptics wrong – and if it does, Nokia stock will gain. But until there’s more than just optimistic talk backing up its growth potential, those skeptics, myself included, aren’t changing their mind.
As of this writing, Vince Martin has no positions in any securities mentioned.
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