With shares rebounding from their November lows, does Nokia (NYSE:NOK) stock offer more upside? As I discussed in prior analysis, shares were fairly priced at around $3.50 a share. Nokia does have upside potential thanks to the 5G catalyst. However, their “also-ran” status compared to telecom equipment behemoths Ericsson (NASDAQ:ERIC) and Huawei could mean disappointment for investors betting on a 5G-fueled rebound.
Shares may have rebounded in the past two months. But with NOK stock appearing to top out around the $4 price level, we could see shares fall back to their 52-week low. Now may be not the time to buy.
Let’s dive in, and see why it’s best to avoid NOK stock at today’s prices.
Huawei Losses May Benefit ERIC, Not NOK Stock
While Huawei and Ericsson are the clear favorites in the 5G build-out story, Nokia has managed to eke out some of this opportunity. Still, the larger peers may have the edge.
However, backlash against Huawei could clear the field. The U.S. is trying to pressure the U.K. and Germany not to select Huawei to build their 5G networks. Such a move gives Nokia a greater shot to maximize this opportunity. But, there’s no guarantee the Chinese firm will be shut out of major European 5G projects. InvestorPlace’s Vince Martin recently pointed out that German Prime Minister Angela Merkel supports Huawei’s presence in her country. Over the U.K., recent news indicates Britain will impose a market share cap but not ban Huawei outright.
Whether or not Huawei gets shut out of the west, Nokia is not likely the clear winner because Ericsson holds the edge. Even in North America, Ericsson may be the preferred vendor. While at Davos, President Trump held a dinner with execs from both Ericsson and Nokia. Yet, Trump announced the U.S. will work with Ericsson, not Nokia, on advanced networking.
Still, it’s a good sign Nokia has a seat at the table. As one of the largest telecom equipment makers not named Huawei, Nokia could benefit from continued U.S.-China tensions. It remains to be seen whether this translates into 5G-fueled growth that beats expectations. But it does help increase the odds of a Nokia turnaround.
Tough To Handicap 5G Prospects
Investors may have pushed NOK stock lower due to guidance cuts. But based on the enterprise value (EV)/EBITDA metric, Nokia looks fairly priced. Especially compared to Ericsson. Nokia’s EV/EBITDA ratio is 8.1, compared to Ericsson’s EBITDA multiple of 8.7.
With this in mind, why buy NOK stock when Ericsson is trading at a similar multiple? You could argue that a Nokia rebound could materially improve operating performance. Assuming Nokia continues to trade at the same valuation, shares would move higher.
But, it’s tough to see what the future holds for Nokia stock. One reason for this is poor shareholder communication. Finnish state investment arm Solidium is a major Nokia investor. The firm recently criticized Nokia for their passive approach to investor relations. This includes Nokia’s unwillingness to hold capital market days. Doing so could help inform the investment community of the company’s 5G strategy.
Solidium does concede that Nokia’s product issues may be a thing of the past. If this turns out to be the case, the company’s 5G prospects are brighter than assumed. In the next few quarters, Nokia could surprise the investment community with strong 5G-fueled results. Doing so would move NOK stock much closer to prices seen before the November sell-off.
All Bets Are Off
With NOK stock, all eyes are on Feb. 6. That’s when the company next announces quarterly results. How confident is the analyst community? According to data compiled by Seeking Alpha, Nokia has had one earnings-per-share (EPS) up revision, against seven down revisions, in the past 90 days.
But it may not be accurate to judge NOK stock on recent results alone. As InvestorPlace’s Tom Taulli discussed Jan. 23, it could take time for Nokia to turn around the ship. A few quarters from now, Nokia could show material improvement, sending shares back to pre-November levels.
Does that mean NOK stock is a buy? I wouldn’t say so. On the long side, why buy Nokia when you can buy Ericsson at the same EBITDA multiple? At $4 a share, Nokia fails to price in uncertainty.
Also, consider that the market’s upward trend may have lifted Nokia’s boat in the past month. With the with the coronavirus crisis threatening to reverse the trend, Nokia shares could tumble in the short-term.
So, NOK stock is a sell? Not exactly, either. While shares could fall back to their 52-week low, longer term the company could surprise. They may not dominate 5G build-outs, but their small share of the market could translate into improved revenue and earnings.
Bottom line? Continue to stay on the sidelines.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
