The wait for Nokia (NYSE:NOK) stock to gain traction continues. A second-quarter earnings and revenue beat sent its shares surging higher. However, Nokia stock has almost fallen back to the $5.20 per share level where it traded before the company released its quarterly report.
NOK can benefit tremendously from the adoption of 5G. But until the company delivers profits and increases investors’ confidence, Nokia stock will struggle.
Reinvention, Low Valuation Have Not Helped Nokia Stock
Thanks to its purchase of Alcatel-Lucent in 2016, Nokia has reinvented itself as a telecom-equipment maker. Consequently, Nokia’s equipment has helped facilitate the transition to 5G service. While NOK’s reinvention should have helped Nokia stock, that hasn’t been the case so far.
On January 14, 2016, the day of the Alcatel deal, Nokia traded at an adjusted price of $6.39 per share. Today, Nokia stock sells for around $5.22 per share, meaning that NOK has lost more than 16% of its value in the last 3.5 years.
After the downturn, NOK is a reasonably-priced stock. The decline has taken its forward price-earnings (PE) ratio to about 13. Analysts’ average estimate predicts that Nokia’s profit won’t rise this year. However, the average estimates call for an earnings increase of 51.9% next year and average annual profit growth of 23.9% over the next five years, as more consumers and businesses begin to use 5G.
Unfortunately, NOK stock has burned investors before. Of course, Nokia was blindsided by the advent of the smartphone. I have recommended NOK repeatedly, only to always see it fail to gain traction. Those who listened to me have collected a dividend, but Nokia stock has not delivered a sustained rally.
Can Nokia Stock Finally Recover?
So what will boost Nokia stock? InvestorPlace contributor Thomas Niel believes NOK will not move much in the near-term. However, he also thinks “new developments on the 5G front” could turn into the catalyst Nokia needs.
NOK traded above $60 during the height of the dot-com bubble. It surpassed $40 per share in 2007 when its share of the cell phone market was 49.4%. That year, Apple’s (NASDAQ:AAPL) introduction of the iPhone pushed NOK into a descent from which it never recovered. As a result, confidence in Nokia has dropped. The company will need to restore that confidence if it wants to spark a recovery in NOK stock.
Should Investors Buy NOK?
I see no evidence that Nokia will become the leader of the telecom-equipment sector. Most other investors probably feel the same way For this reason, NOK stock has traded between the high-$3s per share and the high $8s per share range since 2013. Given this pattern, investors can probably forget about NOK stock reaching $40 or $60 anytime soon.
However, once 5G is adopted more extensively, Nokia stock could break out of its current range. Historically, NOK has traded at an average P/E ratio of 25.3. If NOK meets analysts’ average 2019 EPS estimate of 27 cents, and its PE multiple rises to its historic average of 25.3, NOK stock price would reach $6.83. If its 2020 EPS reaches the average estimate of 41 cents per share, and its PE ratio rises to 25.3, the stock price would reach $10.37.
If NOK, boosted by the 5G revolution finds a way to beat the average estimates, the long-awaited recovery of Nokia stock could finally materialize.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.