Back in March, I discussed the merits of buying Nokia (NYSE:NOK) while things looked tough. In the months since, Nokia stock has rebounded. And that’s no surprise. Despite 2020’s challenges, this remains the year of 5G. The company’s chief competitors, Ericsson (NASDAQ:ERIC) and Huawei, continue to dominate the space. But this so-called “also ran” telecom supplier is no slouch itself.
As InvestorPlace’s Chris Lau wrote May 22, the company’s win rate for 5G contracts is above 90%. And that includes the difficult-to-crack China market. Speaking of China, recent geopolitical developments may further bolster the nation’s success as we enter the second half of 2020.
In short, rising tensions between China and the West could be a gain for Nokia. And not just in the United States. Take, for example, the United Kingdom’s recent move to phase out Huawei equipment from its 5G networks. If other American allies sever ties with Huawei, the telecom equipment maker could see additional gains in revenue and market share.
Yet, rallying nearly 80% from its 52-week lows, shares may have bounced back too much, too soon. For those who own Nokia stock today, there’s some gains left on the table. But, for those considering a buy, you may want to stay on the sidelines for now.
Why Nokia Stock Could Head Even Higher From Here
Until recently, investors weren’t showing a lot of love for this company as a strong 5G infrastructure play. Given the company’s blunders over the past decade, that makes perfect since. But now, with the company proving the bears wrong, investors may continue to jump back into this previously beaten-down stock.
Analysts like JPMorgan’s Sandeep Deshpande agree. In his words, “the elements are falling into place” for Nokia stock. Giving shares the equivalent of a “buy” rating and a price target of $5.50 per share, the analyst sees shares moving higher as investors begin to appreciate the company’s successful turnaround.
The tipping point may be if the company shows free cash flow for the year. If that happens, shares could rally, as investors price the stock on par with its main publicly traded rival, Ericsson.
Right now, Nokia trades for 13.8 times fiscal 2021 (ending December) earnings. In contrast, Ericsson trades for 15.4 times its projected 2021 earnings.
However, Deshpande’s optimistic outlook comes with some caveats. For one thing, his price target leans heavily on projected 2022 earnings. If you take the company’s 2021 projected earnings (30 cents per share), and multiply it by its rival’s FY21 multiple (15.4), you get just $4.62 per share.
Any upside is good news. But $4.62 is less than 10% above where NOK stock trades today. To buy into Deshpande’s thesis, you have to assume things will go without a hitch. And with continued uncertainty, that remains a big gamble.
How This Turnaround Play Could Fizzle Out
Wall Street may be looking beyond the novel coronavirus and pricing stocks accordingly. Yet, markets may be getting ahead of themselves. It remains to be seen whether the second half of 2020 will bring the V-shaped recovery necessary to sustain the recent rally.
In short, Nokia stock may not be pricing in the risks of a continued economic downturn. As this analyst recently discussed, lowered overall demand for the company’s products may outweigh potential gains from the 5G rollout.
If this bearish forecast plays out, and Nokia’s customers delay spending in anticipation of a continued downturn, the recent rally will fast come to an end. Shares could potentially fall back to prior price levels (around $3 per share), as the stock reverts back to its long-term downward trajectory.
That’s not to say this company is a screaming sell right now. Even after rallying higher, investors continue to be cautious with this name. But, the bull case for NOK is no slam-dunk. Given the company’s track record, it’s possible that recent enthusiasm could fizzle out.
The Bottom Line: Consider Waiting Things Out
For years, calling a bottom in this stock has been like trying to catch a falling knife. But, those who were lucky enough to buy in March have seen quick gains. So, what’s the play now, as investors bet on a continued recovery for this once-beleaguered stock?
Despite the potential risks I highlighted above, I wouldn’t go against the crowd right now. With the U.S. cracking down on China, names like Nokia stand to benefit. Add in the company’s continued success with 5G wins, and shares could live up to expectations.
Yet, that doesn’t necessarily make shares a buy at today’s prices. If you bought shares a few months back, you may want to hold onto them for now. There could still be some gains on the table.
But, if you haven’t bought Nokia stock yet, take a wait-and-see approach. Shares may be a stronger buy on a pullback.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
