Nokia (NYSE:NOK) stock is on fire at the moment after a stellar quarter pacified fears regarding the company’s future. Repaying the trust of long-term investors, Nokia stock is up almost 15% over the last six months.
With its comeback story complete, the only question on the mind of several analysts is how far the stock will rise.
I believe NOK is not the kind of stock that will undergo a lot of peaks and valleys. After several years in the wilderness, the company has a solid strategy in place to make sure it increases live network deployments and 5G deals with each successive quarter.
Incoming CEO Pekka Lundmark has said that he wants to work against “complacency and accepting the status quo.” Strong words, but understandable, since this is Nokia we are talking about.
The company ruled the roost in the smartphone game before giving way to Apple’s (NASDAQ:AAPL) iPhone, and the rest, as they say, is history. Lundmark would want to make sure no such mishaps happen to the company’s 5G business model.
Nokia Stock Will Benefit From Covid-19
The novel coronavirus pandemic has been a disaster for several industries. However, some sectors have benefited immensely due to the virus. As more of our work shifts online, countries the world over are seeing the importance of deploying 5G at a quicker pace. The bottom line is that 5G is coming. Nevertheless, the speed at which its used will depend on the region we are talking about.
In the short term, deliveries can stall because every country is reeling from the impact of this crisis, leading to softer sales. Investors could be concerned that a second wave could lead to weak sales beyond 2020. Over there, I think that the concerns are unwarranted.
As I mentioned earlier, the crisis has only increased the demand for faster networking – Covid-19 is a favorable tailwind for Nokia stock.
Verizon Remains a Strong Partner
Nokia stock tanked after reports emerged Verizon (NYSE:VZ) was thinking of replacing Nokia as its main supplier and partnering with Samsung (OTCMKTS:SSNLF) instead. Nokia and Verizon both released separate statements regarding the invalidity of the claims but the damage was already done in the markets.
In the Q2 earnings call, outgoing President and CEO Rajeev Suri said, “We play a critical role in Verizon’s 4G network and continue to work with them to accelerate innovation around 5G technology.”
That should help in pacifying concerns surrounding the reports. Still, it’s a healthy sign that Nokia is not taking anything for granted, and is making sure it is maintaining key client relationships.
Catch-22 Situation
Although the recently concluded quarter was stellar, it does pose one crucial question for Nokia; should the company restore its dividend, considering the positive free cash flow?
In 2019, Nokia stock lost a fifth of its value when the company lowered its outlook in October and suspended dividends. In announcing the fourth-quarter results, Suri said that the company would be in a better position to pay dividends towards the end of the year. Granted, this was before Covid-19 peaked in March.
Still, I believe the company is on track to restore dividends in 2021. But could an earlier restoration be possible?
Well, that depends on what the management is thinking. When it suspended dividends, Suri said the company was directing its funds towards building out its 5G infrastructure. Nokia could not have anticipated Covid-19. It has forced every company to think more about cash preservation rather than expansion.
But with cash flows positive, a dividend restoration will lead to a surge for Nokia stock. There’s no reason to suggest management would be against that. However, due to the Covid-19 situation, the company will hold off on resuming dividend payments.
Fresh Leadership
Although leaving on an upbeat quarter, Suri’s tenure ended with mixed emotions. At the time of his departure, the company faces issues on multiple fronts. Costly 5G equipment, Covid-19, and weak sales are just some of the problems Lundmark will have to deal with as he settles into his role. Speaking about his role and the strategy of the company, Lundmark said, “the challenge now is against complacency and accepting the status quo.”
Complacency is the keyword since we are talking about Nokia here. The company is a case study of how not to lose a competitive advantage. Lundmark will want to make sure Nokia does not suffer a similar fate as it did against iPhone. 5G will power everything from artificial intelligence to automation.
Having a sizeable market share is critical for the prospects of Nokia. It’s encouraging to note that Lundmark has his eyes on this as he assumed his new role.
My Final Word
Nokia has had several ups and downs over the last decade. Investors will hope the peaks and valleys are firmly behind them and the company is moving forward with an effective strategy. Lundmark is saying all the right things as he assumes his official duties. He has a firm vision of where to take the organization and has warned against complacency.
Nokia stock is a buy for me; shares are the cheapest in its peer group. My 12-month price target is $6.50.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. He does not directly own the securities mentioned above.
