The markets can remain irrational longer than you can remain solvent. This is one of the few absolutes you will find on Wall Street. It’s also the underlying reason why I’m so frustrated with Nokia Oyj (ADR) (NYSE:NOK), and not just because I’ve been wrong on the company. NOK stock defies logic, returning nearly 33% year-to-date. But can this remarkable turnaround last?
Investors shouldn’t be blamed for doubting Nokia stock. Although past results don’t guarantee future performance, it does impact how we as humans perceive profitability potential.
I believe that most people who look at a long-term chart of NOK will come to two conclusions: First, this is a company fighting a downward trend, and second, the explosive rally has run its course.
The history of Nokia shares are actually divided into two distinct phases. From 1995 through the end of 2007, NOK stock averaged nearly 42% annual returns. But from 2008 onward, shares average only 11% returns. Even if 2017 were to end now, NOK would still be underwater. Given this disappointing history, I can’t imagine too many investors getting excited over its prospects now.
Indeed, analysts who cover NOK stock are rather ho-hum on its prospects. While only one is outright bearish on Nokia, the majority rank the company as a “hold.” Over the past few months, the sentiment hasn’t changed. If NOK was such a standout opportunity, you’d think that more folks would get the memo.
Nokia Has an Asterisk on Its Name
Don’t get me wrong — Nokia has exciting projects down the pipeline thanks to its cell service and equipment business. InvestorPlace contributor Ian Bezek outlined the company’s recent deal with Mexican firm Altan Redes, which involves “building out a nationwide LTE network as part of a government-backed public-private partnership.”
More importantly, NOK is advantaging a massive opportunity in China through its Nokia Shanghai Bell unit. According to InvestorPlace’s Dana Blankenhorn, “The ‘exclusive platform’ in China will let Nokia turn out gear combining its patents with the low costs for engineering available in Shanghai, so it won’t get beat on price as the world moves toward 5G service, the next big step in mobile internet service.”
In addition to its core business, NOK stock is bolstered by the company’s foray into advancing technologies such as cloud computing and the Internet of Things. Nokia put its money where its mouth is, designing their own specialty semiconductors to power the tech of the future.
The problem, as mentioned by both Blankenhorn and Wells Fargo analyst Maynard Um, is actual integration. Talk is cheap and showroom demonstrations aren’t that much better.
For Nokia stock to move forward, investors need a story with hard numbers. Until they can prove they can compete with the big boys, NOK will always have a question mark on it. Beating out regional rival Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) won’t ease doubts.
NOK Stock Isn’t Your Only Option
The focus towards the potential of Nokia, rather than its actual performance, is ultimately a distraction for NOK stock. I understand that people love a good story. In light of the competitiveness in the broader technology sector, however, it’s hard to pay real cash for unproven profits.
I believe the collision between fantasy and reality is causing the present consolidation in NOK stock. Shares haven’t moved at all over the trailing month, which is a dramatic departure from its volatile trading. Perhaps this is just further negotiation between the bulls and bears before a new leg up. Or, the Nokia story may have run out of gas.
Ultimately, I side with InvestorPlace contributor Will Ashworth’s assessment that Nokia stock is “mediocre at best.” While the company isn’t a terrible play, too many other options exist. Why take the risk on middling dividends or an unsure business model when you have established names like Intel Corporation (NASDAQ:INTC) or Apple Inc. (NASDAQ:AAPL) at your disposal?
More to the point, I think that NOK stock has served its purpose. Astute speculators saw an opportunity that others, including myself, missed. But now that the gains have been made, Nokia needs a bigger catalyst to move forward. I’m just not ready to make that kind of bet.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
