Investors’ interest in Nokia (NYSE:NOK) has increased in the last month despite a lack of news about NOK. The company’s fourth-quarter earnings report, scheduled to be unveiled between the end of this month and early February, may move NOK stock. And after reporting horrendous third-quarter results in October, the outlook for the company’s Q4 results is mixed.
Dividend Cut
Investors could have forgiven NOK for reporting that its net sales rose just 4% in Q3 and for generating earnings per share of only EUR 0.01. But the board of directors shattered shareholders’ confidence by deciding not to pay any dividends for the time being. Until its cash on hand increases to EUR 2 billion, the company will use its resources elsewhere. As a result, NOK stock is no longer suitable for income investors.
The cash savings from the dividend cut will give Nokia the flexibility to spend more on developing products for 5G. NOK may also invest more in its Enterprise and Software segment. In Q3, the weak performance of the company’s Mobile Access and Fixed Access unit hurt its overall results. Conversely, the sales of its software division increased 5% year-over-year, excluding currency fluctuations, and revenue from the company’s Nokia Enterprise segment grew 20% YoY. By investing in its growing businesses, NOK could propel its revenue above analysts’ average estimates.
The Price Target on Nokia Stock Was Lowered
In the last two months, a number of analysts have downgraded Nokia stock. The average price target on NOK stock, however, is still $4.62, according to Tipranks. That’s about 30% above the current level of NOK stock. NOK can reach $4.62 if it keeps winning more 5G contracts. It already has won 48 5G deals and launched 15 live 5G networks
In the long-term, NOK is trying to achieve an operating margin of 12%-14%. Together with the strong growth of NOK’s key segments, its diversified portfolio and patent licensing should lead to sustained profitability. But Nokia admitted that it has more work to do when it comes to 5G:
5G is where we still have work to do, even if we continue to win deals and have successfully launched 15 live networks. Those networks include some of the world’s largest with customers like Sprint, Verizon, AT&T and T-Mobile in the U.S., Vodafone Italy, Zain in Saudi Arabia and SK Telecom, Korea Telecom and LGU+ in Korea.
The Outlook of NOK Stock
In 2020, cost cuts, savings from the dividend cut, and a favorable 5G product mix should help push NOK’s bottom line higher. And the company’s current investments will pay off later. For example, Nokia is strengthening and diversifying its supplier base. It is also investing more in its SoC (System on a chip) solutions. That will enable its 5G market share to climb further.
In 2021, Nokia will spend less on developing its 5G products, putting it in a better competitive position. For example, its RedShark System on a Chip system will cost less to produce, pushing its profit margins higher.
The Headwinds Facing NOK Stock
Nokia reported that its sales had fallen 23%, excluding currency fluctuations, in China in Q3. Its Mobile Access unit continues to underperform in this region. China proved to the world that it could get 5G networks up faster than anyone else. Now it is up to Nokia to win more deals there, boosting NOK stock in the process.
How Nokia Stock Can Rise Further
Nokia is certain to win plenty of 5G development deals in the future. So spending more on research and development and launching more 5G products will benefit the company in the long-term. The 5G rollout is still in its early stages, so the sooner Nokia lowers its costs and invests in improving its products, the more contracts it will win.
The upcoming Q4 report will affirm that the company is on track to meeting its cost-cutting targets. If it announces big contract wins and raises its outlook, NOK stock will quickly reach the $5.00 – $6.00 range.
As of this writing, the author owns shares of Nokia
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