The promise of wide-spread 5G connectivity has been driving a number of tech stocks — from device makers to semiconductor stocks. So, it’s been surprising to see Nokia (NYSE:NOK) lose nearly 40% of its value over the past year.
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Many had been expecting the Finnish tech firm to soar this year, as it sells the equipment necessary to power the 5G revolution. However, cost issues prompted Nokia’s management team to revise its 2020 guidance lower. This, in turn, has hurt investor confidence and helped drive competitors’ share prices higher.
The Case for Nokia
It is not that Nokia’s growth story has damage; it is just not as sparkly as investors had been expecting.
Initially, Nokia’s sales were expected to outpace the market. However, management’s revised guidance suggests the firm will instead perform in the middle of the pack. Management also announced lower free cash flow, earnings per share (EPS) and operating margin targets for the coming year — signalling bumpy roads ahead.
While all of that is certainly gloomy, there’s still a long-term case for the stock. As Morningstar analyst Mark Cash put it, “We still view shares as undervalued due to longer term, higher margin opportunities in areas like software, enterprise networks and 5G, but we now anticipate far more modest gross margin and operating margin expansion than our prior expectations.”
Cash sees shares of Nokia rising to $5.10, suggesting a 36% upside. He’s not alone in his view that Nokia shares are undervalued right now, either. According to the Wall Street Journal, of the 34 analysts covering the stock, 59% have a buy or overweight rating. The average price target for Nokia is $4.73, a 23.5% increase from where the stock is trading today.
It Could Take Time
With that in mind, it might seem surprising that Nokia isn’t more popular. After all, with the market near all-time highs, bargains are hard to come by. However, the reason investors aren’t jumping all over Nokia, as a 5G play is that the firm is unlikely to recover anytime soon.
First of all, Nokia needs to get its 5G business back on track. The firm has had to suspend its dividend and disappoint investors with terrible guidance because it’s facing tough competition from companies like Huawei and Ericsson (NASDAQ:ERIC). Nokia needs to divert all of its excess cash to 5G in order to ensure its place in the future of connectivity.
That pain is likely to persist in the near-term, potentially for all of 2020. Most analysts agree, though, that Nokia is unlikely to lose its seat at the 5G table. Instead, the tailwinds that were expected to drive the firm’s share price in 2020 won’t have an impact until the end of the year at the earliest.
Who Should Buy Nokia
So, is it worth buying Nokia right now to get a bargain? Probably not. It’s going to be months before Nokia can come up with any promising news, so your capital could be better deployed elsewhere. If you already own Nokia, it’s not a great time to sell either — and it is worth sticking it out if you can.
With the share price at just $3.62, Nokia isn’t going to produce a meaningful rally for quite some time. Argus analyst Jim Kelleher pointed out that by dropping below $5, Nokia now has an additional layer of risk. This is because many institutional investors can’t hold shares that trade below certain thresholds, and $5 is a common cutoff.
Kelleher rated Nokia a “hold” over the next 12 months, but gave the firm a “buy” rating with a five-year timeline.
The Bottom Line
I agree with Kelleher, Nokia’s 2020 isn’t going to be anything special, but long-term it looks like a solid 5G play. For now, I’d hold off on taking any new positions unless management is able to brighten the firm’s outlook. It is worth keeping Nokia on your watchlist, though, as the firm does offer a good turnaround play come mid-to-late 2020.
However, with the stock unlikely to make any meaningful movement higher in the coming year, there are other — and better — ways to play the 5G revolution.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.
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