The current novel coronavirus pandemic is affecting earnings and the business outlook for most companies. A large number of investors are now wondering if they should reduce stock exposure in May. The sell-off in Nokia stock in the past year has obviously created an attractive risk/reward profile.
Let’s take a closer look at how Nokia’s quarterly numbers came and what investors can expect from NOK stock in the rest of the year.
Nokia’s Q1 Results
Finland-based Nokia is an important maker of telecom-class networking equipment. Its origins go back to 1865.
In 2013 it sold its mobile business to Microsoft (NASDAQ:MSFT). Since then, the company concentrated on marketing high-end networking gear and software to telecommunications companies as well as internet service providers. It now provides hardware to wireless carriers and licenses its patents to handset and chipset vendors.
First-quarter results showed revenue of 5.36 billion euros ($5.8 billion). The same time last year, revenue had been 5 billion euros. Reported loss came at 100 million euros compared with a loss of 442 million euros in Q1 2019.
The company reports revenue in four segments:
- Networks (around 77% of revenue)
- Software (around 12% of revenue)
- Technologies (around 7% of revenue)
- Group common and other (around 4% of revenue)
The year-over-year improvement was primarily thanks to higher gross profit in networks and software segments as well as cost savings.
Nonetheless, CEO Rajeev Suri said the group “saw a top-line impact from Covid-19 issues of approximately 200 million (euros), largely the result of supply issues associated with disruptions in China.”
This quarterly statement confirmed that Nokia is increasing large-scale capital investments, specifically in 5G networking. Communication service providers globally are its most important customers. In 2019, Nokia signed several important deals to introduce 5G networks in various countries.
Also stateside, it has been in partnership with Sprint which has now fully merged with T-Mobile (NASDAQ:TMUS), which is currently expanding its 5G reach, too. Network equipment by Nokia as well as Sweden-based Ericsson (NASDAQ:ERIC) is used widely in the U.S. market.
Management is quite optimistic that going forward 5G technology will likely drive growth. However, the company lowered its 2020 guidance and trimmed its earnings-per-share forecasts.
NOK Stock Is Fading
You may be well familiar with how the company could not compete against Apple’s (NASDAQ:AAPL) iPhone iOS and Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Android in the last decade. In the late 1990s Nokia was the biggest phone manufacturer in the world. Yet, the company became a laggard in the transition to the smartphone market. And the share price in recent years reflects Nokia’s flagging fortunes.
In early May 2015, the NOK stock price was around $7.40. Today it’s around $3.50.
The stock’s compound annual growth rate over the last five years was -13.42%. Put another way, $1,000 invested in Nokia shares would have decreased to about $486.
Our regular readers may remember that in October 2019, the company ended its dividend. InvestorPlace contributor Mark R. Hake, wrote in depth about the implications of the dividend cut on investor sentiment.
It would be safe to assume that Nokia will not likely resume dividend payments any time soon, so I do not expect passive income seekers to return to the shares. Management has to convince new value-seeking investors to have faith in the company’s 5G story amid the economic uncertainty worldwide.
Can Nokia Stock Recover Soon?
As the numbers above show, NOK stock has had a downward and difficult trajectory. Investors who bought its shares would have lost considerable capital over the past five years. These steep losses have mostly started in January 2019, followed by the sharp decline that October. The stock had its biggest drop in decades after the board cut the dividend.
Nokia’s gets 30% of its sales from Europe and 30% from North America, with Asia, the Middle East, Africa and Latin America trailing. According to the International Monetary Fund (IMF), the global economy will contract 3% in 2020. Yet in 2021, the IMF forecasts robust growth. Stock prices generally reflect expectations of future profits.
Investors who agree that these gray clouds may dissipate in the coming months may want to start investing in NOK stock.
Yet in the Q1 release, Suri said, “We expect the majority of [the] Covid-19 impact to be in Q2. … As the Covid-19 situation develops, however, an increase in supply and delivery challenges in a number of countries is possible and some customers may reassess their spending plans.”
Put another way, there may be further uncertainty about the prospects for global economies and companies in the summer months.
The Bottom Line on NOK Stock
Despite the recent headwinds mainly caused by the pandemic, Nokia management remains bullish about the prospects for technology and its 5G equipment in 2020 and beyond. And yes, despite the gloomy headlines on the potential effects of the viral outbreak, the 4G to 5G transformation is well underway worldwide.
Nokia is a widely held and traded company. In early January, Raymond James upgraded the company to “strong buy” and raised the target price to $4.50.
Nonetheless, I do not expect much short-term positive momentum in the stock in the coming weeks. Instead, it is likely to be range-bound until investors have more clarity on the fundamental metrics of the company amid the pandemic.
If you buy into Nokia shares around these levels, be prepared to hold the stock for several years.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.