The long-term risk-versus-reward potential of Nokia Oyj (ADR) (NYSE:NOK) stock remains a strong topic of debate, especially considering Apple, Inc. (NASDAQ:AAPL) and Samsung Electronic (OTCMKTS:SSNLF) have elbowed NOK out of the mobile device market it once had in a stranglehold.
Nonetheless, NOK stock seems attractive at these levels. It’s true, NOK is no longer the world’s largest mobile phone maker, but its stock doesn’t need that accolade to be a profitable investment.
Where NOK Stands Today
Currently trading at around $6.20 per share, NOK stock is still cheap by most valuation metrics. Shares are is priced at 17 times fiscal 2018 earnings-per-share estimates of 34 cents, which is roughly two points below the S&P 500 index. Combined with its 2.92% annual dividend yield, there are tons of reasons to be patient with NOK.
Plus, assuming The Finish-based tech giant does earn 34 cents in 2018, that would translate to year-over-year growth of 43%. From my vantage point, investors looking for a potential breakout stock should pounce on Nokia, which should trade near $8 when applying a 20 multiple to next year’s earnings, which puts NOK in line with the S&P 500. And I expect the NOK stock to start it’s climb when the company reports second-quarter and first half results next week.
What’s Ahead for NOK Stock?
For the quarter ended June, Wall Street expects Nokia to report revenue of $6.17 billion, though estimates range as high estimate of $6.53 billion and a low estimate of $5.92 billion. Assuming NOK does reach revenue estimates of $6.17 billion, this would mark a year-over-year decline of 3.7%. In terms of EPS, analysts are looking for 5 cents per share, though estimates are as low as 3 cents.
The company has begun to focus on networking (data traffic management in particular) and is on the verge of rebuilding and rebranding its business to capitalize on new growth segments. Although revenue in various segments is on the decline, the rate of decline has drastically slowed, which is an encouraging sign. In the first quarter, NOK reported revenue of $5.7 billion, down 2.5% year over year, yielding 3 cents per share. Plus, there’s a strong chance that the company will top anyalysts’ bottom-line forecasts.
Despite the top-line miss, quarterly adjusted gross margin was 40.8%, compared with 39.7% a year ago. What’s more, Nokia’s operating margin grew 20 basis points to 6.3% on a year-over-year basis. Assuming these trends continue, the company’s EPS trajectory will continue to climb.
While Nokia’s cash balance at the end of Q1 also declined, this, too, is poised to rebound, thanks to the ending of the company’s long-standing patent dispute with Apple.
In May, Nokia not only settled with Apple, but both tech giants agreed to play nice — at least for the time being. forming a new business relationship. It’s not known what the extent of the business relationship is other than that Nokia will supply “certain network infrastructure product and services” to Apple.
The latter has agreed to sell Nokia’s digital health products in its retail and online stores, is a much-needed win for Nokia, especially given the reach of Apple’s iOS platform.
Nokia will receive an up-front cash payment from Apple with “additional revenues during the term of the agreement,” underscores the potential revenue and earnings improvement prospects for the just-ended quarter and full year. And while the sum of cash payment from Apple to Nokia was not disclosed, to the extent it can help Nokia to fund its operations, investors can expect Nokia to use the cash to fuel its capital allocation strategy.
Bottom Line For NOK Stock
Nokia’s timely acquisition of Withings, which played a big roll in the first quarter, should continue to better diversify the business. At Mobile World Congress in February, Nokia promised a summer launch of rebranded Withings products as Nokia products.
These new products, combined with growth in core segments such as networking and data traffic management should continue to change the NOK narrative from a “has been” to a growth company.
As such, owning NOK stock for the long term, instead of trading near-term price swings, can pay off. And its 2.92% annual dividend yield is an added bonus.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
