As I’ve noted in previous columns for InvestorPlace, I’ve been a bull on Nokia (NYSE:NOK) stock for awhile. But of course, I’ve turned out to be very wrong about NOK stock.
In 2019, Nokia stock has climbed just 39%, despite a strong bull market, which has lifted many tech stocks like Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT) much more than that.
But isn’t the valuation of NOK stock much more attractive now? Maybe it could still bounce back? That’s certainly a reasonable idea. But it probably won’t happen any time soon.
The company’s third-quarter earnings report indicated that NOK has some serious issues. True, the company’s top and bottom lines did come in above analysts’ average estimates. But the real problem was Nokia’s scary guidance.
For this year, Nokia is forecasting earnings per share of 0.18 euros to 0.24 euros, compared to its prior estimate of 25 euros to 29 euros. That is quite a material decline.
And the weakness is not expected to be temporary. For 2020, NOK is looking for EPS of 0.20 euros to 0.30 euros, versus prior forecast of EPS of 0.37 euros to 0.42 euros.
The company’s fixed access business continues to decline. As should be no surprise, there has been a non-cyclical trend away from copper-based networks.
But the company’s 5G segment is actually the major problem for NOK stock. While 5G was supposed to be the driver of Nokia stock over the long-term, 5G has instead turned into a laggard. One of the issues is that the upfront costs of the technology, which have been significant, have lowered NOK’s gross margins. It’s true that these costs will eventually fall as the 5G unit grows. But that could take a couple years.
In the meantime, the company’s European business has been weak, and 5G has not been very popular on NOK’s home continent. China has also been a problem, mainly due to fierce competition from Huawei. What’s more, in other markets, Nokia’s rival, Ericsson (NASDAQ:ERIC), has been very aggressive on pricing.
Because of all this, and to raise more cash for its 5G efforts, NOK has announced that it will suspend its dividend for at least the next two quarters It will also focus on restructuring, including leaving certain markets.
The Bottom Line on Nokia Stock
NOK stock definitely has positive aspects. The company’s recent deal with Microsoft is very promising, as it is focused on technologies like AI and machine learning. And the 5G network will facilitate tremendous innovation because of its significant increase in speed and programmability.
As the number two player in the telecom equipment space, NOK also has a full suite of infrastructure and equipment offerings for global companies. Creating that kind of technology from scratch would be hugely expensive, so NOK probably won’t face additional competition in the near-term.
But for the owners of NOK stock, realizing the benefits of NOK’s positives will take time. Even worse, its recent earnings report shows that the senior management team does not appear to have a good handle on its business. Why is it just realizing now that actions have to be taken? Shouldn’t its top executives have anticipated the competition and the pricing issues?
I think so. But now NOK is scrambling to figure things out. In other words, NOK stock could easily be dead money until NOK implements sustainable improvements. That could easily take until 2021 or beyond.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
