Nokia Corp (ADR) (NYSE:NOK) has jumped nearly 25% in a month since April 21. Why is that date important? It was then that I recommended NOK stock on the basis of its strong risk-versus-reward perspective.
But investors have begun to worry that Nokia shares have risen too fast, too soon.
Despite the company reporting strong first-quarter earnings results that beat on both the top and bottom lines, there continues to be fear that Nokia — which lost its grip on global mobile phones sales to Apple Inc. (NASDAQ:AAPL) and Samsung Electronics (OTCMKTS:SSNLF) — is a forgotten story.
Have a little patience. Nokia shares — with a fresh push from Apple, of all sources — can still return another 50%, with a target of $10 per share in the next 24 months.
Reasons to Hop Onboard Nokia
Nokia is up about 6% on Tuesday in the wake of a big development with patent rival Apple.
Specifically, the two have agreed to drop their current set of lawsuits and complaints against one another, and Apple will now pay NOK royalties as part of a multiyear deal. Better still, Apple will resume selling Nokia’s connected health devices, and the two have opened up discussions on teaming up on future digital health initiatives.
Yet despite the run in NOK stock — up 36% year-to-date — shares are still relatively reasonable by many valuation metrics. Based on current prices, Nokia is trading at just under 20 times forward earnings estimates, which is just a hair above the S&P 500’s forward P/E.
And the valuation on that growth is fair, given a price/earnings-to-growth ratio of 1.04 (anything over 1 is considered overvalued, so Nokia is only barely “overbought”).
Meanwhile, analysts expect NOK to earn 33 cents per share in 2018, which would represent 43% year-over-year growth. Nokia stock also yields about 2.8% — not bad for a tech firm, and an additional reason to be patient.
To be sure, there’s still some risks to NOK, which has an analysts’ consensus price target of $5.90. But the company has cleaned up its books with extensive cost-cutting measures and is now profitable and is no longer strapped for cash. As of the most recent quarter, Nokia had $9.86 billion in cash on the balance sheet with total debt of only $4.81, which puts it at a net cash position of more than $5 billion.
Nokia’s cost cuts have been the main reason for the strong cash position. And the company is still in cutting mode.
Last week, NOK announced plans to cut up to 200 jobs in Finland to offset weak demand for its telecom network equipment. The cuts are part of its $1.3 billion global cost-savings plan which was announced after its 2016 acquisition of Alcatel-Lucent.
But this is not just a cost-trimming operation.
The company’s operational improvements in business segments such as mobile networks are also encouraging. In the just-reported quarter, management cited mobile networks as a key growth driver of adjusted revenues. This appears to be just the beginning given that the continued adoption of 5G infrastructure builds, which should accelerate in the next few years.
What’s more, Nokia’s profit margins — up 20 basis points during the quarter — were significant.
Nokia’s management, which continues to target long-term operating margin of about 13% to 14%, hasn’t downplayed Wall Street’s high profit expectations. The news of the recent job cuts, given that it happened after the first-quarter earnings report, suggests Nokia’s profits margins will continue to improve, which should drive higher profitability in the quarters ahead.
Bottom Line for NOK Stock
There are signs that Wall Street is beginning to warn up to Nokia, but with the consensus price target still under $6, many analysts still need some convincing. Perhaps the deal with Apple that takes litigation off the table will be that driver.
It also remains to be seen how consumers will respond to the company’s re-launch of its 3310 handset, which some industry pundits regard as the greatest phone ever made, but so far Nokia is answering the call on execution.
As long as it continues to do so, NOK stock should rise toward $10 per share, making investors healthy profits in the process.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.