There’s one long-running issue with Nokia Corporation (NYSE:NOK): a lack of consistency. That’s true for Nokia as a company, and it’s been true for Nokia stock as well.
After a 10% decline on Thursday following NOK’s disappointing Q1 earnings report, Nokia stock now sits where it did back in early 2012. Shareholders have harvested some dividends along the way, and those who have timed NOK stock correctly have made out well. But over the long haul, Nokia stock simply hasn’t delivered.
On its own, the first-quarter report doesn’t necessarily prove that NOK won’t deliver going forward. It may not even completely refute the bull case on Nokia stock. NOK did reiterate its full-year guidance. The timing of the company’s 5G deals appears to have been an issue, one that should resolve itself as the year goes on.
At the same time, the report highlights the broader concerns about NOK stock at this point. It emphasizes the problem I detailed back in 2017, and again in February. Specifically, it’s exceedingly difficult for a stock to rise consistently without consistent execution and performance by the underlying company. For most of this decade, NOK stock has proven that rule, and it did so again on Thursday.
Nokia’s Earnings
There’s no way to spin it: Nokia’s earnings were disappointing. Adjusted revenue of €5.1 billion did rise year-over-year , but only thanks to the weaker euro. In constant currency, according to management, NOK’s adjusted sales dropped 1%, while its reported sales fell 2%. Nokia had guided for a lighter quarter relative to its performance over the full year. But analysts were expecting at least some growth, and it appears likely that Nokia management was as well.
NOK’s sales dropped, and so did its earnings, which in fact turned negative. Adjusted earnings per share came in at negative €0.02, a mirror image of the €0.02 per share profit the company reported during the same period a year before. The Street had projected EPS of €0.03. Operating profit, too, turned negative after a modest profit in the first quarter of 2018.
Granted, the miss wasn’t huge – and in that context, the 10% decline of Nokia stock might seem like an overreaction. But it seems likely investors were expecting a beat; Nokia has, in recent years, generally guided a bit light, enabling it to often exceed consensus expectations. And beyond the issue of the miss, there’s the question of what the quarter means for the rest of 2019 and beyond.
Is the Selloff of Nokia Stock an Overreaction?
Nokia’s management did try to minimize the importance of the quarter. Its full-year guidance was reiterated, though the company noted “significant pressure on execution in the second half.” Revenues from 5G projects were previously expected to rise in the second half of the year, but more of the revenue appears to have slipped to the second half. Specifically, NOK cited some €200 million of 5G revenue that wasn’t able to be recognized in Q1, but should positively impact the company’s results before the end of the year.
The issue with Q1 isn’t that sales and profits were lost, but rather that they slipped into the second half. And that explanation makes sense. The rising pressure on Chinese rival Huawei presents a potential opportunity for Nokia and rival Ericsson (NASDAQ:ERIC). But it’s also led some customers to rethink their buying decisions, lengthening sales cycle.
The case for buying the weakness of NOK stock, then, is based on the idea that nothing has really changed. The quarter was disappointing, but the company still has at least a chance to hit its full-year guidance.
NOK’s growth is supposed to be much stronger in 2020: EPS of €0.37-€0.42 against €0.25-€0.29 this year. In 2020, 5G projects and cost-cutting are expected to boost its bottom line. The bull case for Nokia stock, from a long-term standpoint, may not have changed all that much after the report. Yet after the decline, NOK stock is cheaper, trading at less than 13 times even the low end of next year’s EPS guidance range.
The Worries About Nokia Stock
At the moment, investors aren’t buying that argument and truthfully, neither am I. NOK has lost credibility over the past few years in terms of delivering on its promises. As a result, it’s difficult to trust its 2019 guidance at this point.
There’s also the risk that Huawei’s troubles won’t quite help NOK and Nokia stock as much as some might presume. Ericsson clearly is going after the customers of its Chinese rivals, and having some success: it posted very strong results last week. NOK’s rivals in other areas of networking like Cisco Networks (NASDAQ:CSCO), Ciena (NYSE:CIEN) and even smaller Adtran (NASDAQ:ADTN) are performing well and posting growth, yet Nokia looks to be falling behind there, too.
Nokia has a big opportunity in 5G. But NOK has had opportunities for years, and it hasn’t been able to take advantage of them. The acquisition of Alcatel Lucent was supposed to be transformative, yet Nokia stock trades well below its pre-merger levels. NOK supposedly had an opportunity in digital health, yet it sold that business after taking an enormous writedown. Cost-cutting was supposed to drive profits, but its revenue hasn’t grown.
At the end of the day, the problem with NOK’s Q1 results is that they require investors to trust the company. They require trust that NOK’s guidance still is correct, and trust that Nokia can nimbly navigate the new 5G equipment environment while fending off Ericsson.
Investors don’t have that faith, with good reason. That’s why Nokia stock is falling so hard after its earnings and why it doesn’t feel like the plunge of Nokia stock is an opportunity.
As of this writing, Vince Martin has no positions in any securities mentioned.
