Nokia (NYSE:NOK) just got a favorable ruling from the German courts over its dispute with Daimler (OTCMKTS:DMLRY) about the company’s mobile-technology patents. The short-term ramifications will likely push Nokia stock to its highest point in the past 52 weeks.
I’ve been skeptical about investing in Nokia in recent years. Still, this ruling can pave the way for future cash flow possibilities for the company. It also can change the way car companies pay for the internet of things (IoT) technology.
That said, I’m the last person to lean on for technology advice. Also, this is just one victory in a process that’s likely not to be decided in 2020. However, Nokia’s business today is looking a little brighter than yesterday.
So, what does this REALLY mean for Nokia stock moving forward? Here are my two cents.
NOK Shares Ought to Reach $6
I don’t think there’s any question that Nokia’s share price will move higher as a result of the court ruling. In June, I stated that I didn’t see it hitting $6 in 2020. With the Nasdaq continuing to hit record highs – something Vice President Mike Pence continues to boast about, oblivious to the fact average Americans are dying by the thousands – the likelihood of Nokia’s share price extending its gains from its March low of $2.34 just got a whole lot better.
In reality, nothing has changed for the company. It continues to work at staking a more significant claim on 5G implementation around the world. As my InvestorPlace colleague, Larry Ramer, stated recently, Nokia’s second-quarter results showed that the company is on the right track.
“Nokia’s Q2 earnings per share came in at .06 euros, versus analysts’ average outlook of .03 euros. The company’s operating margin, excluding certain items, was 8.3%, versus the mean estimate of 4.7%,” Ramer wrote Aug. 17.
“The European company’s Q1 free cash flow came in at 265 million euros, up from a free cash flow loss of 1 billion euros during the same period a year earlier. Nokia reported revenue of 5.9 billion euros, 220 million euros below analysts’ average estimate.”
Free Cash Flow Matters
Anyone who follows my writing ought to know that I’m crazy about free cash flow. Firms that grow FCF over time also tend to increase their share prices. Cash is king and all that.
As a result of generating positive FCF during the second quarter, Nokia’s trailing 12-month FCF is now 1.89 billion euros ($2.26 billion). This is its highest level in the past three years, producing an FCF margin of 8.4% based on TTM revenue of 22.6 billion euros ($27.03 billion)
That’s all well and fine, but its stock is up 118% since the middle of March, which suggests its valuation might have gotten ahead of itself. However, if you consider it has an FCF yield of 8.2% based on an enterprise value of $27.4 billion today.
If it continues to grow its TTM FCF in subsequent quarters, I don’t think there’s any question Nokia stock will hit $6 by the time it reports third-quarter results in late October, early November.
Would I Buy at $5 and Change?
I think if I had bought it when it was under $3, I would be tempted to take profits at this point.
That being said, analysts are generally positive about Nokia’s chances – 29 analysts out of 31 rate it “hold” or better with a 12-month target price of $5.39. And this latest piece of news could deliver a decent amount of revenue down the road. This suggests its business is in a much better place than it was at the end of 2019.
InvestorPlace’s Faizan Farooque recently pondered whether Nokia would be able to reinstate its suspended dividend before the end of 2020. Free cash flow positive, Nokia could reinstate its dividend, something I said in late 2019 was essential for anyone contemplating buying its stock.
Now, I’m not so sure.
I think shareholders at this point would prefer the company to use its free cash to invest in the company’s 5G plans. Eventually, should future German court rulings go its way, it will have plenty with which to pay a 2-3% dividend yield.
Bottom Line on Nokia Stock
Two quarters into 2020, I’m a lot more confident about Nokia’s future than I was in late October when it suspended its dividend.
If you’re willing to hold for two to three years, buying in the $5s shouldn’t come back to haunt you. Nokia stock is a buy.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.