Some stories — you know, crazy pandemics, crazier elections, craziest wardrobe fails — make so many headlines these days that they’ve shoved otherwise major developments off to the side. One of those, 5G technology, promises to change mobile communications like nothing else in generations. Vying for a nice slice of the pie is Nokia (NYSE:NOK), much to the delight of those who own Nokia stock.
The trouble is that with this 5G bakeoff, Nokia will at best win ugly and at worst lose uglier, snatching defeat from the jaws of victory. Just a few months back, Nokia had a full tummy eating the dust of China’s privately held Huawei Technologies — then the world’s undisputed 5G leader. But when the Commerce Department, citing Chinese espionage concerns, cut off Huawei’s access to advanced computer chips, it created a mobile miracle for Nokia and other players, including its Swedish rival Ericsson (NASDAQ:ERIC).
The $21 billion question, then (that’s Nokia’s market capitalization) centers on whether the Finnish company has leveraged or squandered this once-in-a-cellular-lifetime opportunity. Effective Aug. 1, new CEO Pekka Lundmark was given the reigns to make victory possible. How’s he doing so far? And how’s Nokia stock doing given its recently ended quarter?
Nokia Stock Sinks Like a Rock
The vernacular phrase quants and investment wonks use to describe NOK is “no can do.” If Lundmark’s return to Nokia after two decades away was supposed to inspire the troops, it’s hardly done any wonders for shareholders. Since August, Nokia stock has lopped off a quarter of its value.
Granted, much of the slump came off a terrible third quarter that largely predates Lundmark’s arrival. When that earnings report was released Oct. 29, shares of Nokia stock tumbled 13% as the company cut its full-year and margin forecasts.
You have to admire Lundmark for putting on a brave face for his first-ever earnings release, given the glum nature of the news. He proclaimed that Nokia would do “whatever it takes” to take the lead in 5G — which is fine, except for a few things. Very big things. Huge things no new CEO can just pretend or pray will go away like a screened spam caller.
Three Major Challenges Nokia Can’t Ignore
First: If you can’t take the 5G lead or get anywhere close to it when the top dog is effectively cut off at the knees — which would require, in essence, nothing but just showing up — then you’re not going to convince anyone you’ll do “whatever it takes.”
Second: Lundmark needs to prove he’s more than just a feel-good story. Sure, he’s returning to the company where he built his career — but hasn’t been around Nokia since the flip-phone era. He honed his CEO chops at Fortum (OTCMKTS:FOJCF), a Finnish energy company, and the analogy that could hold is that a championship football coach might not find his winning skills translate well to synchronized swimming.
Finally: Nokia stock has lacked consistency and upward trajectory. While dismal this quarter, Nokia’s net profit for the April-June period shot up 22% to $376 million, this despite the challenges all telecoms have faced due to the novel coronavirus. So are we looking at a company on its way up? Or down? Or up and down?
You tell me. If long-run prices were long distance calls, Nokia sends more mixed signals than you’d find in a Manhattan subway during a solar eclipse. Since 2016, prices have waxed or waned 25% or more every single year, and sometimes both (2017). Since January 2019, Nokia stock has been on a frightening nosedive of 37%. Quick Pekka! Call in the analysts! Who say…
Anticlimax Over Analyst Anticipation
Well, they’re hanging in there. The Wall Street Journal reports that currently, more than half (17 of 32) consider Nokia a buy. But 13 call it a hold and with a consensus share price target of $4.47 per share, we’re not talking champagne in the bathtub. (If we were, we’d kindly ask you not to drop your $700 Nokia 8.3 phone in there.) At present, Nokia stock trades at $3.75 so yes, a 19% lift would be nice. But again, so much depends on this little thing called 5G.
I’m going to be honest: Nokia stock stumps me. On paper, it looks like it has all the elements to succeed, including an attractive price-to-earnings ratio of 24-to-1. With Huawei hobbled, 5G dominance is very much in the air and Nokia is still in the early innings of a new game. The new CEO may see paths to victory his predecessors did not.
But to my mind and my gut, Nokia’s only consistency over the years has been its inconsistency. Bold moves, including the purchase of Alcatel-Lucent for $16.6 billion in 2015, have fizzled badly. Some people would call this a great time to buy the bottom; I’m more apt to call it flinging dollars into a broad, flat mud puddle.
All that to say: While it’s not at all proper to write Nokia’s 5G epitaph, the company hasn’t proven ready to write a new chapter either. Those who hold Nokia stock only know the first line: “Whatever it takes,” right? Now that’s making a statement. Just not a case.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.