Nokia (NYSE:NOK) stock cannot catch a break. Since NOK is helping to make the 5G revolution possible, NOK stock should move higher. However, its lowered guidance and a feeling that its technology does not compare well to that of its rivals have hurt NOK.
Now, with NOK stock trading around $3.50 per share, many wonder whether it will ever recover. Although traders can find many reasons to avoid Nokia stock, it still could yield significant returns over the longer term.
The Short-Term Outlook of NOK Stock Is Bleak
Admittedly, I now see my previous bullish call on NOK stock as premature. After Nokia lowered its guidance following its third-quarter earnings report, Nokia stock will remain dead money in the short term and perhaps the medium term as well. InvestorPlace contributor Tom Taulli correctly stated that 5G, which was supposed to be the solution for NOK stock, has become a problem for it.
I disagree with his belief that “Nokia’s situation is hopeless.” However, I see little reason to have any hope for NOK stock in the near-term. When vendors in the company’s home continent of Europe seem to prefer the 5G equipment of Ericsson (NASDAQ:ERIC) or Huawei over that of NOK, the problems facing the Finland-based telecom giant are apparent. If I had to buy the stock of a company in the 5G networking business, I would pick ERIC stock right now.
Ericsson stock has a forward price-earnings (PE) ratio of about 17.5. Since its earnings have spiked 282% during its current fiscal year and are expected to rise 26% next year, its price-to-earnings-to-growth (PEG) ratio is well below one. With Nokia’s earnings falling this year, I cannot say the same for NOK.
Nokia Stock Should Still Move Higher Over the Longer Term
Still, I do not hold a negative view of the longer-term outlook of NOK stock. Assuming bankruptcy is not a serious possibility, sharp pullbacks by stocks often turn into buying opportunities. Even with Nokia’s 5G troubles and its falling earnings, analysts, on average, predict 18% profit growth in fiscal 2020 and another double-digit-percentage increase in 2021. Moreover, the forward PE ratio, based on analysts’ average outlook, stands at about 13.5. That will take the PEG of Nokia stock below one next year.
Further, 5G looks like a tide that will raise all boats. Analysts predict that the 5G chipset market will grow more than tenfold between 2020 and 2026. That will boost not only Qualcomm (NASDAQ:QCOM) and Ericsson, but the entire 5G chip sector.
As a result, the shares of 5G chip makers probably won’t drop meaningfully. at least for awhile. With its strong growth, the 5G stocks, much like cloud stocks right now, will either perform well or excellent. Even if NOK merely does fairly well in the 5G market, I think Nokia stock will be meaningfully profitable.
Ignore the Low Price of NOK Stock
Also, I think the price of Nokia stock can mislead many investors. I rarely pay attention to per-share stock prices. Some $1,000-plus-per-share stocks are cheap, while other names trading at 10 cents per share are overpriced.
I believe the price of NOK stock is misleading. Trading at around $3.50 per share, Nokia stock is viewed by some as a penny stock. However, it has a market cap of $20 billion. That indicates that Nokia stock does not deserve penny-stock treatment.
Moreover, not everyone hates the company’s 5G products. NOK and Microsoft (NASDAQ:MSFT) will form a partnership. The partnership will combine Microsoft’s cloud and artificial intelligence (AI) capabilities with Nokia’s networking products. Together, they will offer Internet of Things (IoT) products for a variety of industries.
The Bottom Line on NOK Stock
Investors have become too negative on Nokia stock. The fact that it lowered its guidance, while telecom companies seem to prefer its peers such as Ericsson and Huawei, bode poorly for NOK. For that reason, I think Ericsson is a better networking equipment stock than NOK.
Still, I expect the owners of NOK stock to eventually come out ahead. The massive growth of 5G industry will likely benefit all the major companies that make 5G chips. Moreover, Nokia’s partnership with Microsoft could give NOK an edge in certain 5G niches.
As things stand now, NOK may not be the best 5G stock, but I think it will eventually be profitable.
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.
