Do you remember the line from Wall Street where Gordon Gekko calls Terafly, one of the stocks recommended by Bud Fox, “a dog with fleas?”
One of many classic lines from the 1987 movie about the inner workings of Gekko & Company, a fictional corporate raider run by Gordon Gekko (Michael Douglas), the movie is far more interesting than Nokia Corp (ADR) (NYSE:NOK) stock.
In fact, Nokia stock may last have been a buy around the same time the movie came out, nearly 30 years ago.
While I’m being somewhat facetious about the stock’s last brush with success — it’s delivered a scintillating annual total return over the past 15 years of -7.14%, more than 11 percentage points worse than the S&P 500 — I’m honestly perplexed why anyone would invest their hard-earned money in this dog with fleas.
Whether the stock is $5 or $50 — assuming a 1-for-10 reverse split — there are so many other candidates to throw your money at that it’s truly mind-boggling.
Nokia Stock May Appear Attractive
But, before I continue to trash NOK stock, let’s look at what it has going for it that might be attractive to investors.
- It generates $22 billion (1 Euro = $1.07) in trailing 12-month revenue, a chunk of that from its 2015 acquisition of Alcatel-Lucent SA (ADR) (NYSE:ALU).
- In its Q3 2016 report released October 27, 2016, management announced a quarterly profit of $282.5 million on $6.4 billion in revenue, a decline of 11% and 7% year over year, respectively.
- On a per-share basis in Q3 2016, Nokia stock made 4 cents per share, a 50% decline from the same quarter a year earlier.
- Its Nokia Technologies segment saw revenue increase 109% in the third quarter to $377.7 million; operating profit increased by 168% to $240.8 million, an operating margin of 63.7%.
- The division includes Nokia’s digital health and virtual reality initiatives.
- Nokia has some new phones either on the market or soon to be released, including the Nokia 8 that will deliver true value to phone buyers.
- It has $6.4 billion in net cash, which works out to $1.12 per share.
So, the value investor could make the argument that if you back out the cash, you would pay just $3.55 per ADR based on a January 24 closing price of $4.67. Given a 2017 earnings estimate of $0.23 per share, you’re currently paying 15.4 times earnings [$3.55/$0.23].
Here’s Why I Wouldn’t Own Nokia Stock
While the phones are getting good reviews, it’s not what’s going to take the stock to double-digits, especially when neither Apple Inc. (NASDAQ:AAPL) or Samsung Electronic (OTCMKTS:SSNLF) appears ready to cede market share.
While Nokia Technologies generated 40.5% of Nokia’s overall operating profits in the third quarter, its revenue accounted for just 5.9% of overall sales, which means the division is going to have to ratchet up acquisitions to make a dent in the top line.
“Nokia still has a networking division, and is wading deeper into virtual reality and healthcare-tech waters. Those are solid businesses, and will keep money flowing,” InvestorPlace Feature Writer James Brumley wrote recently. “Health and networking aren’t growth industries though, and both are fiercely competitive. Virtual reality’s best days are still ahead of it, but that too is already a crowded field, and Nokia is well behind the leaders there.”
So, you can pay 15.4 times earnings (20.3 times earnings including the cash per share) for Nokia stock, which really doesn’t appear to have anything going for it beyond Network Technologies, or you can pay 11.8 times earnings for AAPL stock, which has captured 26% of the market share for wireless headphones since launching AirPods in mid-December.
Apple’s still got a trick or two up its sleeve, and despite having a dividend yield about one-third Nokia’s, the growth prospects at Apple are much better (even considering reduced sales estimates for the iPhone 7 due to buyers waiting for the iPhone 8 in 2018).
Nokia might not be a dog with fleas, but I definitely wouldn’t put it in the same class as Apple; if you’re going to buy a tech stock this year, don’t make it Nokia stock, at any price.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.