After it lost the cell phone market, Nokia (NYSE:NOK) transformed itself into an infrastructure player. That means 2018 and, especially 2019, should have been great times to be a Nokia shareholder.
That they haven’t been tells you everything you need to know about Nokia stock entering 2020.
Nokia is on pace to deliver $25.6 billion of revenue in 2019, thanks to networks purchasing gear for 5G networking. But it’s not making any money at it. It earned just 6 cents per share during the third quarter, on revenue of $6.3 billion.
For the fourth quarter, which the company will report Feb. 6, analysts are expecting earnings of 14 cents per share on revenue of $7.5 billion. Whether it reports numbers in line with consensus estimates or not is a rounding error.
Ultimately, it is time to walk away from NOK stock.
Good Times?
How did Nokia get into this mess?
It would be easy to blame Huawei, the Chinese company. But if Huawei were taking the 5G pot, rival Ericsson (NASDAQ:ERIC) of Sweden would not be doing well, either. But ERIC stock is doing quite well — shares are up 40% in the last two years while Nokia is down 25%.
Reporters who follow the story daily blame Nokia’s management, starting with CEO Rajeev Suri. He chose the wrong technology for 5G chip sets, he cut headcount when he should have been expanding it and he missed repeatedly on earnings.
When you’re giving analysts a quote from Mike Tyson — “Everybody has a plan until they get punched in the mouth” — it means you’re getting punched in the mouth.
The Yield Trap
For most of this year Nokia was getting some action from “income speculators,” traders betting on dividend yields. At the time, Nokia was offering a dividend yielding over 6%.
But such high dividends are yield traps, subject to being cut without notice. Nokia’s announcement in its third-quarter report that the dividend would be suspended cut the stock price by over 20%.
This caused even bulls like InvestorPlace’s Tom Taulli to throw in the towel. Nokia, he wrote recently, is hopeless as an investment. Ericsson is pricing aggressively, Huawei is selling hard and Nokia’s technology is too expensive to make money.
The company’s recent deal with Microsoft (NASDAQ:MSFT) to cooperate on artificial intelligence and the internet of things may be a good one. But if it is, buy Microsoft.
Will Profits Ever Come?
Losing teams always have a plan for next season. The New York Mets might win next season. Nokia has a plan for 2020, too, and there are analysts who are buying it. That plan involves upgrading networks from 4G, making money from private networks and growing software revenue.
Nokia says it wants to “fully monetize” its patents for things like self-driving cars. But it’s getting fierce pushback. It recently agreed to submit a case against Daimler to mediation. By doing this it hopes to avoid a European Union antitrust complaint Daimler filed against it. Daimler, in agreeing to mediate, said the dispute involves “essential patents for telecommunications standards.” In other words, they’re fighting over old tech. If getting more from software is Nokia’s plan, the plan is already getting punched in the mouth.
The Bottom Line on NOK Stock
If you’re stuck in Nokia stock, you can hope for a turnaround. Maybe the Microsoft deal will be huge, maybe it can win in mediation and maybe it can take some big contracts. Maybe the Mets will win the pennant next year.
If you’re not in NOK stock, just walk past this car wreck. As InvestorPlace’s Todd Shriber notes, there are better shares you can own if your theme is 5G. Stocks like Qualcomm (NASDAQ:QCOM), which has been on fire recently, are only unlike Nokia in a good way.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.
