As a 5G play, Nokia (NYSE:NOK) earns “cup of coffee” status. However, despite the share price of NOK stock being about the same as a cup of java, an investor can acquire shares of a company with some leverage to the 5G theme. That, and Nokia’s status as a winning play on the new telecommunications system could be short-lived.
Following a dismal 2019 showing, NOK stock has rebounded to start 2020, gaining nearly 7% year-to-date while sparking hope that this could be the year the company gets it act together. A Raymond James analyst even upgraded the stock to a “Strong Buy” from “Outperform” in early January. More recently, Nokia was one of two companies selected by France’s Orange to run 5G in Europe’s third-largest economy.
That’s a nice feather in Nokia’s cap. However, it may have been more of a shot at China’s Huwaei than it was an endorsement of the Finnish telecom-gear maker.
Over the near-term, NOK stock could get a lift from a product reveal event later this month; Although, investors should not expect the pomp and circumstance of, say, an Apple (NASDAQ:AAPL) product launch. That said, Nokia bulls probably would like to hear some commentary about the company’s efforts to bring a foldable smartphone to market.
5G and Issues to Digest
Getting away from handsets, Nokia may have some legal issues to wrangle with. Last month, it was reported that Finland’s Financial Supervisory Authority (FSA) is looking into the profit warning and dividend cut announcements delivered last October that sent Nokia stock stumbling — a decline from which the shares haven’t recovered.
The worst case scenario for Nokia here is a $2.77 million fine from the FSA. However, it’s still a bad look.
When focusing on 5G, which Nokia bulls are almost assuredly doing, the outlook is murky at best. The company is badly lagging rivals such as the aforementioned Huwaei, South Korea’s Samsung Electronics (OTCMKTS:SSNLF) or Sweden’s Ericsson (NASDAQ:ERIC) in the 5G infrastructure race. Ericsson hasn’t been anything to write home about, shedding more than 8% over the past year. However, that’s better than more than 35% lost by NOK stock over the same span.
Making matters worse for investors is that Nokia’s profit margins are dreadful. Its top line is decent, but a scant percentage of that revenue makes it way to the earnings column.
Additionally, there are other signs that point to potential disappointment for Nokia investors. First, at the end of the third quarter, Nokia’s debt-to-equity ratio was 0.33. Two years ago, it was 0.18. Secondly, return on assets, equity and investment remain negative — though there are some signs those metrics are improving.
On the bright side, Nokia’s net cash position is stable to improving. But that cash will likely be routed to 5G projects, and not revitalizing the dividend anytime soon.
Bottom Line on NOK Stock
To be sure, Nokia isn’t disappearing tomorrow and it does offer some promise as the 5G theme expands over the course of this year.
“We believe Nokia’s core operation should benefit from 5G network infrastructures requiring more hardware to cover the increased quantity of spectrums bands,” said Morningstar in a recent note. “Since 5G’s fastest data speeds are short wavelength, Nokia’s small-cell antenna systems may be desirable products to properly propagate 5G.”
Still, the risk/reward on NOK stock isn’t all that compelling — even with the “cup of coffee” price tag. Put simply, there are better, operationally superior companies out there with robust 5G footprints that reward investors more than Nokia with less risk.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
