Finland-based telecommunications giant Nokia (NYSE:NOK) had a dismal performance in 2019. NOK stock started the year at about $6 and finished shy of $4, losing over 35%.
The price currently hovers around $4. Stockholders are understandably wondering if the share price can soon go back to January 2019 levels. NOK stock is expected to report Q4 and full-year 2019 results on Feb. 6.
I’d urge investors to analyze the results before committing new capital. There is likely to be more volatility in the stock before a longer-term up move starts.
What to Expect from Q4 Earnings
When Nokia reported third-quarter results in late October, investors were disappointed. Although the quarterly results were roughly in-line with expectations, management issued weak guidance targets and the stock got pounded.
In addition, management said that the dividend was being “paused to increase investments in 5G and strategic focus areas and to strengthen cash position” until further notice. Thus Nokia stock is not suitable for passive income investors anymore.
Q3, saw the group revenue rise 1% YoY on a constant currency basis. However, full-year earnings guidance by down 22%. Nokia blamed rising costs in keeping 5G solutions competitive.
Nokia stock reports revenue in four segments:
- Networks: On a constant currency basis, net sales grew 1%. Networks sales contribute over 90% of total revenue.
- Software: On a constant currency basis, net sales grew 5%.
- Technologies: On a constant currency basis, net sales grew 2%.
- Group Common and Other: On a constant currency basis, net sales were flat.
Nokia is an important maker of telecom-class networking equipment. It sells hardware to wireless carriers and licenses its patents to handset and chipset vendors.
Analysts will likely scrutinize the upcoming Q4 earnings to see whether the segments, especially Networks, are growing and if the cash from the dividend cut is being used efficiently.
5G and Nokia Stock
Many of our readers would be well familiar with how the company could not compete against the iPhone iOS and Android in the last decade. In the late 1990’s Nokia was the biggest phone manufacturer in the world. Yet, the company became a laggard in the transition to the smartphone market.
Recent research led by Juha-Antti Lamberg of the University of Jyväskylä, Finland highlights that in the case of Nokia, “In business history, we can think of very few other cases in which new competitors so quickly and forcefully dethroned an overwhelmingly dominant market leader.”
Eventually, in 2013 it sold its mobile business to Microsoft (NASDAQ:MSFT). After that sale, the group has concentrated on marketing high-end networking gear and software to telecommunications companies as well as internet service providers.
The most recent quarterly statement confirmed that Nokia is increasing large-scale capital investments, specifically in 5G networking. The company is quite optimistic that going forward 5G technology will likely drive Nokia’s growth.
Its most important customers are communication service providers globally. In 2019, Nokia signed several important deals with major providers across the globe to introduce 5G networks in various countries, including Austria, Egypt, New Zealand, Norway, Saudi Arabia, South Africa and Switzerland.
Stateside, Nokia has been in partnership with Sprint (NYSE:S), as the latter expands its 5G reach. Network equipment by Nokia as well as Sweden-based Ericsson (NASDAQ:ERIC) is used widely in the US market
Nokia’s current 4G customers will likely upgrade to 5G in the coming quarters, but the company has a few risks that could derail its outlook.
Headwinds for NOK Stock
First of all, a potential global economic slowdown, especially in China could be a threat to NOK stock’s earnings. At present, net sales come from six geographic regions:
- North America: 30%
- Europe: 28%
- Asia-Pacific: 21%
- Greater China: 8%
- Middle east & Africa: 7%
- Latin America: 6%
The company has already said that it cannot be immune from the adverse impact of U.S.-China trade wars.
Furthermore, in China there is reportedly more support for Chinese vendors as the country moves from 4G to 5G. Earlier in 2019, CEO Rajeev Suri also highlighted another dimension of difficulties in China, when he said:
“Competitive intensity has slightly increased in certain accounts as some competitors seek to be more commercially aggressive in the early stages of 5G and as some customers reassess their vendors in light of security concerns, creating near-term pressure but longer-term opportunity.”
Analysts interpreted his words as referring to the Chinese telecom giant Huawei. Last year, news outlets reported that the U.S. government may “provide funding to Ericsson and Nokia to fortify them against an increasingly powerful Huawei.”
The Chinese market comes with both opportunities and difficulties and there’s still plenty that could go wrong for Nokia stock in 2020.
The Bottom Line on NOK Stock
Over the past several years, Nokia’s Networks revenues have declined considerably. This decrease has corresponded to the continued longer-term drop in NOK stock price. Since 2014, the share price has declined from about $8.6 to a recent 52-week low of 3.33, seen on Nov. 14, 2019.
The sell-off in Nokia stock in Q4 2019 has obviously created an attractive risk/reward profile. And since late December, the share price has improved to the $4-level. In early January, Raymond James upgraded the company to “Strong Buy” and raised the target price to $4.5.
Although there may be some more short-term positive momentum in the stock, I do not expect Nokia shares to reach $5 or $6 soon. Instead, it is likely to be range-bound until investors have more clarity on the fundamental metrics of the company.
Now that Nokia stock’s dividend is suspended, management has to convince new value-seeking investors to have faith in the company’s 5G story.
Therefore, if you buy into Nokia shares around these levels, be prepared to hold the stock for several years. Alternatively, if you are experienced in the options markets, you may also consider hedging your position with covered calls.
Such a hedge would offer some downside protection and also enable you to participate in a potential up move. For example, Mar. 20 or July 17 expiry ATM calls may be appropriate for some investors.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.