Nokia Oyj (ADR) (NYSE:NOK) reported quarterly numbers recently, and they weren’t that good.
But the market didn’t seem to care. Despite largely missing expectations across the board, revenue being flat year-over-year, gross margins dropping, operating margins dropping, and earnings dropping, NOK stock has still traded higher in the days following that report.
Is NOK stock just lucky? Or is there something else behind this upward momentum?
For all intents and purposes, the bull thesis on Nokia stock rests almost exclusively on the forthcoming 5G boom. NOK has invested heavily to make sure that it is properly exposed to and ready to benefit from that boom. Everything else right now is just background noise leading up to that boom.
So what is next for NOK stock?
This stock can and will head higher as it leads into its biggest catalyst in recent memory.
Here’s a deeper look.
Nokia and the 5G Boom
When you mention Nokia, most individuals think of the company’s old phone business which never gained much traction.
But that is old news. That old phone business is gone. Nokia sold it to Microsoft Corporation (NASDAQ:MSFT) back in 2014.
Today, Nokia is a technology infrastructure company that is a pure play on two huge forthcoming trends: 5G and the Internet of Things (IoT).
Broadly speaking, Nokia provides the equipment which is the technology underpinning data transfer and storage around the globe. As we all know, data is exploding thanks to the mainstream emergence of IoT.
In every market, from appliances, to phones, to watches, to clothes, there seems to be a smart device which tracks something important. All those devices need a means to produce, store, and transfer data.
That is where NOK comes into play. It provides those means.
More critically, 5G is coming, and that is a huge tailwind for NOK. The company is already a leading player in the 4G/LTE broadband market, so it will naturally be a big winner in this massive forthcoming 5G-upgrade cycle. Over the next several years, demand for new 5G-integrated products and technology components will soar, and NOK’s numbers will start to look a lot better.
From this perspective, it is easy to see why investors largely ignored the quarterly numbers. They were just near-term noise. Everyone is looking toward the 5G boom, and until something happens to negatively affect that catalyst, NOK stock should head higher.
Nokia Stock Could Get Above $7
Management is very confident about its ability to fully capture benefits from large-scale 5G deployment globally over the next several years. Revenue growth is expected to inflect into positive territory. Margins are expected to start expanding, and earnings are expected to head higher.
In other words, Nokia stock is turning into a growth story.
Considering the massive tailwinds underpinning the improving growth narrative, I think it is pretty likely that NOK records around $0.45 in earnings per share in 2020. That is roughly in line with both management’s guide and Street consensus estimates.
A market-average 16-times forward earnings multiple on those $0.45 earnings implies a 2019 end-price target of $7.20.
Nokia stock currently trades around $6, so a $7.20 2019 price target implies another 20% upside in less than two years. That is a pretty good return profile.
Bottom Line on NOK Stock
Don’t be surprised by the stock’s continued strength even after a mediocre earnings report.
NOK stock is building toward something big, and that something big is the large-scale deployment of 5G technology over the next several years. So long as that thesis remains intact, NOK stock will grind higher.
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As of this writing, Luke Lango was long NOK.
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