Nokia (NYSE:NOK) has been reinventing itself for more than a decade and still doesn’t have its act together, which explains the underperformance of Nokia stock.
The Finnish company unloaded its handset division to Microsoft for $7.5 billion in 2014, which the software giant later wrote off at a loss. A year later, Nokia became the world’s second-largest mobile equipment maker after its $16.6 billion acquisition of its smaller French rival Alcatel-Lucent.
In theory, times should be good for Nokia. Tech research firm International Data Corp. estimates that spending on new 5G equipment will reach $22 billion in 2022 compared with $528 million in 2018.
Concerns about rival Huawei’s cozy relationship with the Chinese government have kept the company in the sights of the U.S. government. The Trump administration has placed the company on a trade blacklist. Nokia stock, though, can’t seem to catch a break.
Earlier this year, delays in the rollout of 5G equipment caused Nokia to post a surprise quarterly loss. Further complicating the picture is the consolidation in the U.S. wireless markets, as evidenced by the $32 billion Sprint-T-Mobile merger that closed in July.
The company’s China business also continues to struggle. Chief Financial Officer Kristian Pullola warned in July that “there is more support for local vendors in China” as the country moves from 4G to 5G. He added the company would take into account the conditions in the world’s most populous nation as it makes its long-term plans.
Nokia recently slashed its 2019 and 2020 earnings guidance and announced that it would put a “temporary” hold on its dividend. Both Ericsson and Huawei, though, are in better shape.
Sweden-based Ericsson raised its 2020 sales forecasts thanks to stronger-than-expected demand for 5G. Even Huawei has commented that the financial impact of the U.S. government blacklist hasn’t been as bad as the company expected.
Ericsson Stock Is a Better Choice
Not surprisingly, Nokia stock has underachieved in 2019, plunging nearly 40 percent. The stock currently trades at roughly a 28 percent discount to the average 52-week price target of Wall Street analysts of $4.58. ERIC stock may be a better choice than the Finnish company.
ERIC shares are up about 4 percent since January. Earlier this year, CEO Borje Ekholm blamed the company’s disappointing results on the failure of analysts to understand its business.
That’s a unique excuse for sure. Ekholm and the analysts have made their peace. Telecom analysts in Europe are saying that ERIC is “likely taking share and becoming the de-facto preferred vendor in Western markets” at Nokia’s expense.
Analysts have an average 52-week price target on ERIC of $10.41, indicating a potential upside of more than 13 percent. ERIC recently agreed to a $1 billion settlement with the U.S. government over allegations that it violated the Foreign Corrupt Practices Act, eliminating a cloud that hung over the stock.
NOK trades at a multiple about 14 times next year’s earnings. ERIC is at 17 times. Revenue for both companies is expected to fall in 2019 and rebound in 2020, with NOK rising 1.3 percent and ERIC gaining 3.7 percent.
Jonathan Berr doesn’t own any shares of the aforementioned stocks.
