Nokia Oyj (ADR) (NYSE:NOK) have come in a bit over the past few months. The shares trade right at $6, the lowest levels since early May. The recent, modest pullback comes after a nice run following the U.S. presidential election pushed NOK stock to a then-15-month high of $6.65.
Looking at the chart, it’s not hard to imagine Nokia stock falling further, particularly if it breaks a support level right at $6. The fundamentals give the same feeling. That’s not to say that it’s all bad news for NOK stock.
For instance, Nokia has transformed itself over the past few years, reorienting itself around its network business. There’s still a bit more along the way in terms of cost savings. Nokia is outperforming rival Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC), which looks further behind in its own restructuring efforts.
But both Nokia and Ericsson appear to be losing substantial share to Chinese maker Huawei Technologies Co., Ltd., whose revenue is growing at a 20%+ annual clip. Nokia’s new phone business, built by licensee HMD Group, doesn’t look like quite enough to overcome pressure in networking, even with the recent release of the Nokia 8. And a licensing business, headlined by a major deal with Apple Inc. (NASDAQ:AAPL) executed earlier this year, similarly helps — though perhaps not quite as much.
With NOK stock closer to the highs last month, I then thought the stock had run out of steam. Now, at $6, I don’t think there’s quite enough to jumpstart the run just yet.
Can The Nokia 8 Goose Nokia Stock?
The Nokia 8 is clearly the first shot at the high end for the “new” phone business. And it’s a big deal for Nokia, because the 8 needs to succeed for the company to expand beyond simply providing low-cost, lower-end phones largely aimed at emerging markets.
In the weeks since its release, it’s not yet clear that the 8 really changes the long-term outlook for Nokia in smartphones. On this site, Dex Dunford last month argued the Nokia 8 held its own against the Google Pixel from Alphabet Inc (NASDAQ:GOOGL). But other reviews have been more circumspect.
From a specs standpoint, the Nokia 8 can challenge both the Pixel and Samsung Electronics products. It offers plenty of storage and a high-end Snapdragon chip from Qualcomm, Inc. (NASDAQ:QCOM). But the design seems a touch clunky, and overall the device looks good enough to get good reviews but not good enough to scream “Nokia’s Back!” in the mobile phone space it once dominated.
The device hasn’t reached our shores yet, though it appears that launch is likely to come soon. That, of course, means the entry into the U.S. market will come amid the attention given the iPhone X — attention that could keep Nokia 8 from getting much of a foothold here. Investors buying Nokia stock in anticipation of a rebirth in smartphones may be disappointed. Licensing revenue from HMD can help — but driving growth against a $36 billion market cap and $2 billion-plus in annual net earnings may be too much to ask.
Networking Concerns For NOK Stock
Meanwhile, the core networking business continues to be weak. Nokia trimmed down full-year guidance for the Networks business in its first-half report in late July, projecting “market conditions to be slightly more challenging than earlier anticipated”. NOK had already projected that the market, and its sales, would decline year-over-year; that drop now is expected to be 3-5% year-over-year.
Nokia stock bulls point to 5G as a driver, and those efforts are inflating R&D spend and pressuring margins. But it’s not as if investors are keen in the networking business — anywhere. Cisco Systems, Inc. (NASDAQ:CSCO) and Juniper Networks, Inc. (NYSE:JNPR) are trading at under 13x and under 12x forward EPS, respectively. Ericsson is scuffling. And in Nokia’s space, Huawei clearly is taking share.
The Networks business is the profit engine for Nokia, driving more than two-thirds of operating profit, before corporate overhead, in the first half of 2017. But it seems aggressive to see much, if anything, in the way of growth there — even as 5G starts to slowly arrive over the next few years. The market is declining, and competition is stiff. It’s a tough combination.
That leaves the licensing business to drive real upside in NOK stock past $6, whether through IP licensing or smartphone agreements. But they don’t seem like enough. Nokia probably can grow earnings modestly over the next few years, if the economy cooperates, and almost definitely will continue paying a decent dividend (currently yielding about 3%). That still looks priced in, however. Nokia stock needs something more – and I’m just not sure what that’s supposed to be.
As of this writing, Vince Martin has no positions in any securities mentioned.