Nokia (NYSE:NOK) stock looks cheap. At a current price just above $4, shares are valued at about 15 times the midpoint of 2020 earnings-per-share guidance. Nokia expects earnings to grow over time, too, as profit margins expand.
Meanwhile, Nokia should see growing demand for its 5G (fifth generation) wireless equipment. China’s Huawei, a key rival, has been put on the U.S. government’s “Entity List” as a national security concern. As a result, the U.S. is pressuring its allies to instead use equipment from Nokia and Ericsson (NASDAQ:ERIC).
There’s seemingly a nice case to be long Nokia right now. But that bull case has one problem: it’s existed in some form for years now. It’s never played out for any length of time: NOK stock touched a six-year low in November before a recent bounce.
It’s possible this time is different. But, as the old adage goes, “this time is different” are the four most dangerous words in investing. And so far, there’s simply not enough evidence to suggest that this time will be different, and that Nokia will finally deliver consistent shareholder returns.
We’ve Been Here Before
On Jan. 31, 2019, Nokia released its fourth quarter of 2018 earnings report. The report itself was solid, if unspectacular. Earnings were roughly in line with Wall Street estimates, while revenue was better than expected. But it was guidance for 2019, and particularly 2020, that made NOK stock look potentially attractive.
Nokia’s outlook included earnings per share of 0.25 EUR to 0.29 EUR for 2019, and strong growth to 0.37 EUR to 0.42 EUR in 2020. The latter figure — about 42 to 48 cents, based on exchange rates at the time — made NOK stock look attractive.
Shares closed at $6.35 the day of the release. The midpoint of the 2020 outlook implied a reasonable 14-times forward price-earnings multiple for a growing company with a tailwind from 5G. Based on the 2018 distribution, NOK stock added a dividend yield over 3%.
On Feb. 6, 2020, Nokia released Q4 2019 results. Full-year adjusted EPS came in at 0.22 EUR, below the initial outlook. That outlook had been cut after the third-quarter report, at which time Nokia also suspended its dividend.
Q4 earnings did beat analyst expectations. But it appears lower employee bonuses were the key factor, while Nokia guided for a 250 million EUR increase in incentive payments this year.
Even with the lower incentive payments in 2019, full-year EPS actually declined year-over-year. Meanwhile, 2020 EPS guidance of 0.25 EUR to 0.29 EUR only suggests profits will be what they were supposed to be in 2019.
Nokia did project adjusted operating margins of 12% to 14% within three to five years. It had originally planned for 12% to 16% margins in 2020.
NOK Stock Looks the Same
And so, Nokia stock in early 2020 looks awfully similar to how it looked roughly a year ago. Shares then traded at approximately 14-times 2020 EPS guidance; the multiple now is around 15 times. The dividend is gone, but management said on the post-earnings conference call it could return as soon as this year’s fourth quarter (Nokia’s board of directors wants net cash to reach 2 billion EUR. Nokia closed 2019 with 1.73 billion EUR).
The 5G tailwind remains. The U.S. still is pressuring Huawei. Nokia continues to find cost savings, with an estimated 300 million EUR on the way in 2020. Those savings, along with leverage from revenue growth, should drive the planned expansion in margins and subsequent earnings growth in coming years.
Of course, there’s one notable difference: NOK stock is much cheaper. It’s declined 37% from its close on Jan. 31 of last year.
A History of Disappointment
If the 2019 and 2020 stories are roughly the same, the obvious question is, why the story will play out differently this time around. History suggests it won’t.
After all, Nokia has been a serial disappointer. Its performance has been so bad that it squandered being on the right side of what literally was one of the worst deals in history. In 2013, Microsoft (NASDAQ:MSFT) paid Nokia $7.6 billion for its phone business. Microsoft sold that business to Apple (NASDAQ:AAPL) supplier Foxconn for $350 million three years later.
Nokia stock is down 70% over the past decade, has dropped by half over the past five years, and has lost 23% of its value in the last three years. All the while, management has promised growth is just around the corner, and NOK bulls have seen upside ahead from a “cheap” stock.
Neither has played out. And looking forward, it’s hard to see why this time truly is different. Nokia itself doesn’t expect any market share improvement in 5G in 2020, with its share this year projected to be roughly flat at about 27%. An underappreciated issue on that front: it’s difficult to change suppliers in the transition from 4G to 5G.
U.S. Attorney General William Barr floated the idea of U.S. and allied governments acquiring Nokia or Ericsson to combat Huawei. Such a move would make little sense. As Bloomberg noted, the billions of dollars required would go to Nokia investors, not the research and development spending needed to make those Western manufacturers competitive.
Again, NOK stock is a classic “this time is different” case. Those cases are dangerous almost by definition. But history aside, there’s not much evidence of a company executing well, or being anything but the third-best player in 5G. Given that 5G sales “cannibalize” 4G sales to some extent, third best is not enough.
And it’s not as if investors lack choices in 5G. ERIC looks attractive. Cisco Systems (NASDAQ:CSCO) is cheap and has some exposure to the trend. Qualcomm (NASDAQ:QCOM) has pulled back some 14% in recent weeks.
Those are excellent companies who lead their markets. Right now, Nokia is not. Until that changes — and I’m skeptical it will — NOK stock will remain the value trap it’s been.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.