Nokia Corp (ADR) (NYSE:NOK) used to be known primarily for phones that sported high-quality cameras. It rode those, along with its Symbian operating system, to many years of success. However, some management missteps and an ill-thought-out partnership with Microsoft Corporation (NASDAQ:MSFT) sent Nokia’s smartphone business into a tailspin.
However, Nokia phones may be back. The company is making a big splash with a new line of phones and marketing arrangement in 2017. And, the company’s less flashy network infrastructure business continues to grow, recently absorbing Alcaltel Lucent SA (ADR) (NYSE:ALU) in an industry-shaping merger.
NOK stock is up big to start the week, but will shares keep rallying, or is this just another false dawn for the beaten-down stock?
Nokia Stock Pros
Alcatel-Lucent Merger Benefits: While many still think of Nokia stock as a consumer electronics play, the company is rapidly transforming itself into a leading mobile networking infrastructure play. The business fusion with Alcatel nearly doubles the company’s revenue on an ongoing basis.
The combined firm has the scale to be an industry heavyweight. Plus, Nokia is able to save a great deal of money (somewhere along the lines of $1 billion per year) thanks to the merger. However, the post-merger company will end up laying off as much as 14% of its workforce by 2018.
Large Dividend: Most people don’t think of penny stocks as a place to get dividends, but it’s a long-held belief worth reconsidering. Despite Nokia’s low share price, it’s still capable of delivering sizable shareholder yield. Always remember that share price doesn’t directly equate to a company’s strength; Nokia produces more than $20 billion per year in revenue, despite its small share price.
Historically, Nokia has rewarded shareholders with large, though erratic, dividends. The company paid 29 cents in dividends in 2016, a near-doubling of 2015’s payment. The 29 cent payment, at today’s share price, represents a yield of almost 7%.
Profit declined immediately following the Alcatel-Lucent merger, suggesting that 2017’s dividend payment will probably be lower. But, over the years, Nokia’s management has consistently paid generous dividends, despite difficult and rapidly-changing business conditions.
Phone Relaunch: The most visible catalyst for Nokia stock, at least in the short-term, is the smartphone relaunch. Nokia famously blundered several years ago, prematurely shutting down its Symbian platform. Abandoning its own successful OS, Nokia bet the house on Microsoft’s phone OS. But, like all Microsoft phone attempts, this one ended up in complete failure, as Microsoft’s phone OS has steadily maintained low single-digit market share over the years.
Nokia has cut loose from Microsoft exclusivity and will soon be launching new Android phones. Additionally, Nokia offloaded must of the risk (and much of the upside) from the new phones since licensing its brand to a new operating company that will actually produce and sell the phones.
Much of the talk regarding Nokia’s stock price revolves around the phone launch, so it is something worth watching closely. However, in practice, Nokia has moderate upside if the new lines work, while losing little directly if the phones fail to gain traction.
Nokia Stock Cons
Increased Competition in Network Equipment: While Nokia has moved largely from consumer electronics to networking equipment, competition problems haven’t left it behind.
Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) just put up a stinker quarter. ERIC stock dropped sharply, and Nokia fell in sympathy. Ericsson is arguably Nokia’s closest peer company nowadays.
At fault, low-cost Asian competition. Huawei continues to drive pricing and margins sharply lower. This comes at a particularly uneasy time, as many global telecom operators have already completed their 4G network upgrades, thus allowing them to cut capital spending for the time being.
Global Economic Weakness: Along with rising competition, the industry will continue to see weakness heading into 2017. With the 4G cycle largely completed, and 5G still a ways off in most markets, companies like Nokia find themselves in a lull. Analysts project that the total addressable market for networking equipment will shrink in 2017.
The ongoing slowness in emerging markets continues to be a big issue. While the U.S. economy has picked up steam in the back half of 2017, Latin America remains in a funk and much of emerging Asia is also struggling. This has depressed equity valuations for telecom companies and made it less attractive for them to push forward into new growth initiatives. With the dollar rising to new heights following Trump’s victory last month, emerging market telecoms will likely stay hunkered down for a few more quarters.
Phone Distraction: There are reasons to think Nokia’s smartphones could take off. NOK still has a dominant position in feature phones, giving the company a leg-up selling upgrades in poorer countries. And, Nokia’s brand still has value.
But, the market has evolved sharply since Nokia last saw success in the phone space. Low-cost competition is far stronger now than it was then, and Nokia offers less differentiation with Android than it previously could via its own ecosystem.
Considering modest upside to Nokia, given the brand arrangement, there is risk that investors, analysts, and management will spend too much time and energy fretting about the phone business rather than concentrating on the much more important networking segment.
Verdict
There is a lot to like about the new Nokia operation. The company appears likely to be strongly profitable once the Alacatel-Lucent merger and layoffs are fully digested. Management rewards shareholders with large dividend payments. And, there’s a nice, though modest, upside option if the branded smartphones take off. But, it appears as if 2017 may be another fairly difficult year for the networking equipment industry.
That being said, there doesn’t seem to be any rush to get into Nokia stock over the next couple quarters. It is unlikely to rip until the economic cycle turns.
As of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
