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Why Nokia Stock Is a Show-Me-First Situation

Luke Lango

It has been a rough run for shares of Nokia (NYSE:NOK) over the past several years. This was once one of the world’s largest mobile phone companies. Today, the company doesn’t even have a mobile phone business. Instead, market forces have relegated NOK to selling end-to-end networking solutions to telecom-service providers.

NOK Stock: Why Nokia Stock Is a "Show Me First" Situation

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That’s a fine business. But it’s not a growth one. As such, during the process of Nokia going from huge mobile phone maker to networking solutions provider, NOK stock has dropped from $15 a decade ago to $5 today.

Now, 5G is supposed to save the day for Nokia. Broadly, the mainstream commercial roll out of the next-gen wireless technology may significantly expand the company’s addressable market. Ultimately, this transition could drive revenues and margins materially higher.

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While possible, revenues and margins haven’t moved materially higher in several years. Thus, investors won’t believe it until they see it. They aren’t seeing it now, nor do I anticipate such a development soon. Thus, NOK stock will likely remain depressed for the foreseeable future.

5G Could Save the Day

Currently, management is pitching the idea that 5G is going to save the day for Nokia stock. They may be right.

5G is a huge revolution and advancement in the global-telecom world. Put simply, it’s far superior to anything currently available. It’s also launching at a time when: a) the number of connected devices in the world is growing exponentially, and b) every service is becoming an internet service in some shape or form. Thus, 5G isn’t just better. It also has the potential to dramatically expand the addressable market.

Nokia is at the heart of the 5G pivot. The company makes and sells the end-to-end networking solutions which are essentially the building blocks for 5G coverage. NOK has also won over 40 5G contracts, which is more than any other components provider. Essentially, these deals make them the global end-to-end 5G-solutions leader.

That’s why Nokia management is so excited about this transformational tech. If the 5G market does live up to the hype — and if NOK maintains market leadership position — revenues and profits will head materially higher over the next several years. That robust profit growth will launch Nokia stock upward, especially from today’s depressed base. Shares currently trade at just 13-times forward earnings, with about 25% of the market capitalization covered in cash on the balance sheet.

This Is a “Show Me” Situation

Unfortunately, the aforementioned bull thesis lacks conviction, given the company’s track record of persistent revenue declines and margin erosion.

Ever since Nokia spun off its mobile phone business in 2012, this company has had trouble reporting consistently positive results. Revenue declines have characterized most years since then. Additionally, margin compression and negative profit growth have stymied NOK stock during that same timeframe.

To sump up, NOK is associated with negative revenue growth, margin compression, and profit erosion. Investors aren’t going to believe that this shoddy trajectory will suddenly inflect higher because of the 5G rollout. Instead, investors will require proof that this will happen. Like it or not, that proof will come in the form of improved numbers.

That isn’t happening yet. Last quarter, revenues declined, and margins compressed. It also likely won’t happen soon. Analysts expect revenues and profits to drop down this quarter too, and the quarter after that.

In other words, the numbers aren’t going to improve in a meaningful way anytime soon. That’s because the bulk of the 5G rollout has been pushed back to 2020. Until those numbers do improve, Nokia stock won’t stage a sustainable move higher. That’s why you should avoid shares right now.

Bottom Line on NOK Stock

5G could save the day for Nokia stock. However, things have been depressed at this company for so long, that investors won’t believe in the 5G turnaround until they see it.

They aren’t seeing it today. They won’t see it anytime soon. As such, for the foreseeable future, NOK stock will remain depressed.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.

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