Nokia Oyj (ADR) (NYSE:NOK) stock has been showing some traction lately, and this is more than just a bounce off the bottom. The company has definitely made bold changes over the years, transforming itself into a global networking equipment provider. In fact, during the past 12 months, NOK stock has logged a gain of 37%.
Yet I still think there should be some caution. If anything, it could get tougher to churn out the gains.
Reasonable Earnings from NOK
The latest earnings report from NOK highlighted this. Consider that the company’s networking business is expected to fall by 3% to 5% this year.
Now this is not necessarily a reflection of the company’s products or technology. The fact is NOK has a full-blown offering that meets the needs of the world’s largest customer base. No doubt, a big help was the $17 billion merger with Alcatel-Lucent. But NOK has also invested heavily in R&D, which has resulted in cutting-edge software and cloud technologies.
So what’s the problem then? Well, the overall market is in a funk. When it comes to infrastructure investments, the major carriers have been trying to defer investments in new technologies.
Granted, this will ultimately change, as there will be a need to rollout 5G technologies. But this will likely not hit critical mass for a few years.
In the meantime, the networking market remains brutally competitive. NOK must battle against rivals like Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC), Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR). Plus, the low-cost Chinese operators like Huawei Technologies Co. and ZTE Corp appear to be the biggest threat.
Yet NOK has tried to diversify its business, such as with licensing. Keep in mind that the company has amassed a treasure trove of patents, which have come from the company’s long history in the mobile industry.
While it can be tough to pull off a licensing strategy – as seen with the recent troubles with QUALCOMM, Inc. (NASDAQ:QCOM) – the efforts for NOK have so far paid off nicely. A notable example is a recent deal with Apple Inc. (NASDAQ:AAPL). Even though the details of the settlement were not disclosed, it looks as if it nonetheless was a nice win for NOK. The buzz is that there was a $2 billion upfront payment and ongoing fees that could amount to several hundred million.
But NOK has also snagged other deals with other big players, such as Samsung Electronics and Xiaomi Technology. And expect more deals.
For the most part, licensing revenues sport high margins – since there is mostly just the collection of royalties and ongoing legal fees – and are often recurring. So this business should provide a nice base for NOK.
Although, there is another part of the diversification effort: the move into next generation technologies like digital health, VR (Virtual Reality) and digital media. A key part of this is the acquisition Withings, which is a pioneer of smart watches, scales and other devices.
NOK Bottom Line
So all this seems great, right? True. But the nagging issue is that these businesses are fairly small. After all, roughly 88% of revenues come from networking. This means that the other businesses will need significant growth to make up for the declines.
It’s really a tough spot for NOK stock. Even though the company has a solid strategy, it will still take quite awhile to bear fruit. And when it comes to Wall Street, there is just not enough appetite for being patient, especially for an industry that is crowded with tough competitors.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.