Why Nokia Stock May Finally Be a Buy Below $5

Nokia (NYSE:NOK)  has been plagued by stagnant revenue growth and sluggish margin performance for several years, a stretch in which NOK stock has done nothing but drop. But since the beginning of the year, bulls have been saying that the huge forthcoming 5G catalyst would change all of that, and cause Nokia stock to meaningfully outperform.

But we are now more than nine months into 2019, and that hasn’t happened. In 2019, NOK stock is down 15%, while the S&P 500 is up 18%. Further, Nokia stock presently trades more than 25% below its early 2019 highs.

In other words, although 5G is coming in 2020 and 2021, Nokia stock has yet to begin outperforming. Instead, through 2019, the stock has done nothing but continue to under-perform.

That’s not surprising to me. While the bulls have been saying that Nokia stock is heading for $10, I’ve preached caution on NOK stock all year long (see here and here).

Nokia has been so bad for so long that investors are skeptical about the chances of 5G boosting NOK stock. And Nokia stock won’t get a huge upward push from 5G until 2020.

But because valuation matters and Nokia stock has plunged to its 2019 lows ahead of what could be a much better 2020, I think now could could be the right time to buy NOK stock. Here’s a deeper look at the reasons for my belief.

Nokia’s Fundamentals Will Improve

Nokia is essentially at the heart of the 5G revolution. NOK company makes and sells end-to-end networking solutions that are the building blocks for 5G coverage. Among major components providers, Nokia is the second biggest player in terms of 5G exposure, having won dozens of commercial 5G contracts to-date. Thus, Nokia looks poised to win big as 5G  gains momentum over the next few years.

Indeed, with the 5G rollout in its first few innings, Nokia’s numbers are already getting better. Last quarter, the company reported 5% year-over-year constant currency revenue growth, one of the best revenue growth rates this company has reported in recent memory.  Moreover, its adjusted operating margin climbed 1.6 percentage points YoY.

These numbers are projected to get better over the next few years as more of Nokia’s 5G markets go live. Analysts’  average estimate calls for 2%-3% revenue growth in both fiscal 2020 and 2021, according to YCharts. From fiscal 2019 to fiscal 2021, analysts, on average, expect its profit margins to expand by roughly five percentage points. During this stretch, its EPS is expected to run from under 30 cents to over 40 cents.

NOK is getting ready to enter growth mode, after failing to grow for several years. That change should enable NOK stock to climb above its current level.

The Valuation of Nokia Stock Is Appropriate

As mentioned earlier, Nokia stock likely won’t rally tremendously until 2020.

But, at its current levels, the valuation of Nokia stock seems appropriate,  given the lack of certainty about its 2020 rally.

That is, Nokia’s EPS looks poised to exceed 40 cents in fiscal 2021. To be conservative, let’s call it 40 cents. Based on a  multiple of 16 times analysts’ average FY21 earnings estimate, which is average for the markets, my fiscal 2020 price target for Nokia stock would be $6.40. Discounted back by 10% per year, that equates to a 2019 price target of $5.80.

Nokia stock presently trades at more than a 15% discount to that 2019 price target. That’s a sizable discount. As a result, the uncertainty facing NOK is fully priced in at this point, and the shares probably won’t drop much further.

The Technicals Provide A Solid Floor

The technicals underlying NOK stock indicate that the shares may have found a bottom slightly below $5.
Click to Enlarge

Take a look at the attached chart. NOK stock has bottomed twice before in 2019 just below $5. It looks like the shares want to find their footing at that level again, as the selling of NOK has eased around these levels over the past few days.

If the support level breaks, then it’s a “look-out-below” situation. The next support levels won;t come into play until the stock drops meaningfully from its current levels. But all signs now indicate that the upper $4’s are a technical bottom for NOK.

The Bottom Line on NOK Stock

When it comes to NOK stock, the saying “be greedy when others are fearful, and fearful when others are greedy” comes to mind.

The reality now is that the 5G boom will provide a meaningful catalyst for Nokia. When everyone was optimistic about this catalyst, NOK stock was overvalued, and the stock was doomed to fail. Now, though, everyone is pessimistic about this catalyst. As a result,  NOK stock is undervalued, and seems destined to climb.

As of this writing, Luke Lango was did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/why-nokia-stock-may-finally-be-a-buy-below-5/.

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