NOK Stock Looks Dirt Cheap and It Could Stay That Way

Sluggish 5G demand has weighed and will continue to weigh on NOK stock

Shares of telecom infrastructure provider Nokia (NYSE:NOK) have struggled significantly over the past year. During that stretch, NOK stock has dropped more than 30% — versus a 20% gain for the S&P 500 — as the company’s big 5G tailwind has been overshadowed by persistent headwinds related to competition and geopolitical uncertainty.

Nokia Stock Looks Dirt Cheap and It Could Stay That Way
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On the heels of this huge selloff, the stock looks pretty cheap. Fiscal 2020 earnings estimates sit around 30 cents. The stock trades around $4. Thus, shares are trading at just 13-times forward earnings versus a market-average multiple of 19-times forward earnings and a technology sector-average multiple of 23-times forward earnings.

But it increasingly appears that Nokia stock is cheap for a reason. That is, persistent headwinds related to competition and geopolitical uncertainty have sapped all the growth out of this company. Without growth, the stock may remain cheap for the near future.

Consequently, while I think the stock has big upside potential in a long-term window given its dirt-cheap valuation, I also think that shares will remain choppy in 2020 thanks to persistent headwinds. For these reasons, I’m not buying here. I’ll check back in a few months once today’s headwinds ease.

Persistent Headwinds Remain

The Nokia growth narrative in 2019 was supposed to be characterized by rapid 5G expansion and huge growth. Instead, 5G uptake has been slower than expected and there hasn’t been much growth. Ultimately, that’s why shares are down more than 30% over the past year.

Sluggish 5G demand will persist for the foreseeable future. So long as it does, Nokia stock will continue to struggle for gains.

There are few notable headwinds here. First, you have increasing geopolitical uncertainty, especially with respect to Chinese-based Huawei. There have been some concerns that Huawei — which competes with the likes of Nokia and Ericsson (NASDAQ:ERIC) in supplying telecom infrastructure for 5G — will be legally obliged to allow Chinese government officials to use the company’s components to “spy” on other countries.

Hauwei has denied that it would allow any such things to happen. Nonetheless, Ericsson Chief Executive Officer Börje Ekholm recently said that 5G demand globally was “slowing down, in many countries” because of this Huawei issue.

Second, enterprises globally are waiting to see returns on their first investment in 5G before plowing more money into the new technology. It could take several months for these enterprises to see tangible returns. Consequently, this approach could lead to a multi-month slump in 5G demand.

Third, there has been some opposition in North America to the number of antennas that would have to be built in order to support 5G. Considering this opposition is relatively new, it’s likely to stick around for a few months. So long as it does, it will provide a headwind to 5G demand in North America.

Nokia Stock Is Cheap

In the big picture, persistent sluggishness in the 5G market will likely keep Nokia stock dirt cheap for the foreseeable future.

There’s no denying that shares are cheap here. At about 13-times forward earnings, the stock trades at a huge discount to the market, technology peers, and its historical self. But this cheapness is warranted by a lack of growth. In 2020, the company’s sales are projected to be flat, while profits are expected to barely rise.

In other words, at the current moment, this is a zero-growth company. Zero growth companies deserve cheap valuations. Thus, so long as there’s no growth in the pipeline, Nokia stock will remain cheap.

Growth could come back into the picture in the back half of 2019, as today’s headwinds ease and as we get the introduction of more 5G smartphones into the marketplace. At that point in time, resurgent growth could spark a nice rally in the stock.

But, until then, shares will likely remain weak, thanks to a lack of growth firepower.

Bottom Line on NOK Stock

Nokia stock could have a big second half of 2020, as growth comes back into the picture. But until then, shares will likely remain depressed, mostly because the cheap valuation and low stock price are warranted given the company’s sluggish growth.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.

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