Once upon a time, Finland-based Nokia (NYSE:NOK) was one of the world’s largest mobile phone operators. Back then, revenues at Nokia were ramping. So were margins and profits. Nokia stock was flying high at $30.
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Instead, market forces have relegated Nokia to selling end-to-end networking solutions to telecom service providers, which, while a fine business, hasn’t exactly been a fountain of growth for Nokia. As such, revenue, margin, and profit trends have been sluggish over the past several years, and NOK stock has been on a steady downtrend to $5.
Bulls think second-quarter 2019 earnings, due at the end of July, will spark a long-overdue turnaround rally in NOK stock. Are they right?
I’m not convinced. Second-quarter earnings themselves won’t be great. The guide may strong, and the outlook may be favorable. But, Nokia has been in a secular downtrend for so long that the stock has become a “show-me” situation. That’s to say, until the company actually shows investors that things are getting better, NOK stock won’t bounce back.
The second-quarter earnings report won’t be that breakthrough earnings report. As such, while NOK stock could bounce back long term, I don’t think Q2 earnings will be the catalyst that inspires the rebound.
The Bull Case for Nokia
The bull thesis on NOK stock boils down to two letters: 5G.
5G is the next big thing in the telecom world. It’s a major step up from 4G and LTE on all fronts and is set to change the internet landscape because it is launching at a time when:
1) the number of connected devices in the world is growing exponentially, and
2) every service is becoming an internet service in some shape or form. As such, 5G just isn’t better than what’s out there currently. It has the potential to dramatically expand the telecom market.
That’s great news for Nokia. The company makes and sells end-to-end networking solutions, which are essentially the building blocks for 5G coverage. The company has already won several dozen 5G contracts and is well on its way to being a leader in the 5G game.
If the 5G market does live up to the hype, and if Nokia maintains a leadership position, the company’s revenues and profits will head materially higher over the next several years, and NOK stock will take off from today’s depressed levels.
At a high level, this all means that the company’s future is significantly brighter than its present.
That bright future could start in the second-quarter earnings report. Although 5G isn’t a mainstream thing yet, that will change in the back-half of 2019 as 5G tech rolls-out more broadly. For Nokia, that means second-half numbers should be a lot better than first-half numbers. To be sure, second-quarter numbers won’t reflect 5G tailwinds. But, the guide and management commentary should, and bulls think that should be enough to turn the sinking ship of NOK stock around.
Earnings Aren’t a Major Catalyst
The aforementioned bull thesis on NOK stock misunderstands one very important thing: investors won’t rush back into NOK stock just because management says things are getting better.
That isn’t to say management has a credibility problem. They don’t. Rather, it’s to say that management has been beating the “things are getting better” drum for the past several years, and during that stretch things simply haven’t gotten any better. As a result, Nokia’s financial trends have remained sluggish, and the stock has remained weak.
Because the downtrend here is so pervasive, NOK stock is a “show-me” situation. Most investors won’t buy into the 5G hype simply because the guide is strong and management is bullish. Instead, they’ll buy into the 5G hype once it shows up on the income statement.
That won’t happen until the third quarter, at the earliest. As such, while Nokia stock could be braced for a big turnaround, second-quarter earnings won’t be the catalyst that kick-starts the rally.
Bottom Line on Nokia Stock
There is a potentially bright future for Nokia through the 5G revolution. But, at the current moment, that future lacks tangibility and clarity. It won’t get added tangibility and clarity until later this year. As such, for the foreseeable future, it’s probably best to wait on the sidelines with Nokia stock.
As of this writing, Luke Lango was long MSFT.
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