Nokia Oyj (ADR) (NYSE:NOK) has been showing some signs of life lately. For the year so far, the shares have logged a gain of nearly 11%. So s there more upside with NOK stock? Don’t count on it.
Keep in mind that — for the past year — NOK has been undergoing a massive transformation. The key part of this was the $17 billion merger with Alcatel-Lucent.
According to the annual report from Nokia:
“We started the year primarily as a mobile networks and patent licensing company. Today we are a fundamentally different company, with a complete portfolio that spans mobile, fixed, cable, routing, optical, standalone software, services, digital health, and VR, as well as licensing activities covering patents, brand, technology, and more.”
All this is backed up with 40,000 employees in R&D (which involves the legendary Bell Labs), 31,000 patents and operations in more than 100 countries. What’s more, there are expected to be about $1.27 billion in cost synergies by next year.
So all in all, things should be very promising for NOK stock, right? Perhaps so. But it could take some time for the major changes to have a real impact. For example, the industries that NOK is targeting — like virtual reality and the Internet of Things (IoT) — are still in the early phases.
But more importantly, there will likely be sluggishness in the core networking business. The main reason: Telecom operators seem to be in no hurry to transition to 5G systems. Let’s face it, this move demands tremendous capital costs. As a result, the focus will be on trying to get as much as possible from the existing networks.
NOK has already acknowledged this. Keep in mind that the guidance is for there to be a drop of about 2% this year.
Nokia Stock And the Challenges
NOK must contend with a tough competitive environment. Just some of the rivals include Motorola Solutions Inc (NYSE:MSI), Mitel Networks Corp (NASDAQ:MITL) and Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC).
Although, the low-cost Chinese operators may be the biggest threats, such as Huawei Technologies Co. Last year, the company saw its revenues jump by 32% to $75.1 billion and the earnings came to $5.3 billion. NOK, on the other hand, posted revenues of $24.9 billion and suffered a net loss of $978 million.
OK, so what about the Nokia 3310 phone? What might this mean for NOK stock? Actually, the retro strategy looks spot-on — and the demand for the phone appears to be considerable.
Yet there are some notable drawbacks. Consider that the Nokia 3310 phone is only available on 2G networks, which limits the market potential. There is also no integration with Facebook Inc’s (NASDAQ:FB) WhatsApp. This is important since many people in foreign markets must pay for SMS.
Something else: NOK will only be getting licensing revenues, which may ultimately come to a couple bucks per phone. In other words, even if the it is a hit with customers, the financial impact may not necessarily be significant.
Bottom Line on NOK Stock
It’s encouraging that Nokia is making bold moves. And this is not just about with the Alcatel-Lucent merger. NOK has also made some interesting acquisitions, such as in the telehealth space. Oh, and the Nokia 3310 shows that the company is pushing innovation.
But again, all these are long-term initiatives. True, NOK stock is paying a hefty 3.5%, which is certainly at the high-end for the tech . Yet for investors, this may be the where much of the return will come from for the next few years, not necessarily from sustainable capital gains.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
