Making money from Nokia (NYSE:NOK) has become more challenging than many had anticipated. Despite both myself and others predicting a recovery, Nokia stock cratered after the company took down guidance and suspended dividend payments.
NOK stock may struggle to stand out in the near term as it retrenches and works to catch up to market peers that many feel have surpassed them. However, with a low cost and the potential of 5G, investors may still have a speculative case for a position in Nokia stock.
NOK stock continues to reel from its recent earnings report. NOK met earnings estimates. However, traders sent it falling by more than 23% in a single day as the company cut forward guidance and announced that it would not pay a dividend in either the third or the fourth quarter.
This seems counterintuitive in many respects. Given the potential of 5G to transform the tech industry, NOK stock should look like a clear buy. Moreover, both I and many of my InvestorPlace colleagues that NOK stock will eventually prosper from 5G.
Nokia Stock Lags Ericsson on Valuation
Admittedly, given what has happened, NOK stock looks like more of a gamble at this stage. The company has work to do to at least match the offerings of competitors. However, I still see a case for it as a speculative bet.
Thanks to the lower stock price, the forward price-to-earnings (PE) ratio has fallen to just over 13. Moreover, amid profit fluctuations, analysts still expect an average annual earnings growth of 13.9% per year over the next five years.
Ericsson’s more attractive financial situation mutes that case somewhat. ERIC supports a forward PE of just over 17. Over the same five-year period, analysts forecast average profit growth of 64.2%. However, Nokia’s dividend suspension implies the company will resume the payout in 2020. If that occurs, that should give NOK stock a significant boost.
5G Could Still Benefit Nokia
Moreover, investors should remember that NOK stock remains profitable despite these challenges. Also, the company continues to pursue other ventures.
Nokia and Microsoft (NASDAQ:MSFT) just announced that they would collaborate on solutions that incorporate Microsoft’s cloud, artificial intelligence (AI), and machine learning applications with Nokia’s networking and communications solutions.
Furthermore, the market tends to reward cutting-edge technologies with outsized valuations. Granted, most of the higher valuations tend to go to newer, higher-growth companies. Still, should the market react to all things 5G like it has responded to cloud or software-as-a-service in recent years, the PE ratio should go much higher than its current level.
The company’s competitive position differs from 2007 when it led the market in cellular phones and briefly topped the $40 per share mark. Barring some unforeseeable occurrence, I do not think it will return to that level. Still, with the NOK stock price barely above $3.50 per share, I see substantial room for growth as 5G moves to the forefront of tech.
Final Thoughts on Nokia Stock
Despite a devastating earnings report and a massive drop in the NOK stock price, investors can still build a speculative case for buying Nokia. Nokia’s struggles finally caught up with NOK following the last earnings report. Now, with the temporary cash boost coming from not paying its dividend, it hopes to at least catch up to its peers.
Still, the report has made many rethink previous bullish calls on NOK. Also, ERIC stock may look like a better 5G play currently.
Though it lags, many possible catalysts such as a return of the dividend, or an increased interest in 5G stocks could help NOK make a comeback. Moreover, it continues to profit and continues to work with other firms on technology solutions.
Though Nokia’s near-term outlook appears uncertain, 5G adoption and growing profits could still bring about a recovery in NOK stock.
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.