Should you buy the massive pullback in Nokia (NYSE:NOK)? Nokia stock more than doubled in the months following the novel coronavirus crash. But, in recent weeks, the telecom equipment maker’s shares have done a 180. At around $5 per share in August, the stock changes hands now at just under $4 per share.
And that’s no surprise. With the recent setback regarding its 5G-driven turnaround, there’s good reason why investors are starting to bail on what’s been until now a rebound play. An “also-ran” when it comes to 5G contract wins, Wall Street isn’t cutting the company any slack when it falls short.
Does that mean the bull case for Nokia stock is broken? Not exactly. While losing out on a massive 5G supply deal, other contract wins could make up the difference. Add in the stock’s low valuation relative to rival Ericsson (NASDAQ:ERIC), and there’s still good reason to go contrarian and buy the recent pullback.
Yet, there’s still a big risk that buying now is like trying to catch a falling knife. Shares may look “cheap” now. But there’s chance they could fall to even “cheaper” prices.
So, what’s the play here? There’s no reason to go bearish, but a wait-and-see approach may be best for those going against the grain with this 5G underdog.
Is the Turnaround Still in Motion for Nokia Stock?
But, as Lau argued, this major setup isn’t the end-all, be-all for Nokia stock. Namely, due to the company still locking down contract wins with names like Dish Network (NASDAQ:DISH). Lau also discussed how the company’s potential edge in Open RAN solutions also bodes well for its turnaround.
Yet, while the situation isn’t as dire as the recent sell-off implies, that’s not to say the stock will be a reversal in sentiment soon. As this commentator noted, it may take winning a 5G contract on par with the lost Verizon deal to move the needle yet again.
Is such a deal on the horizon? It’s possible. Given the U.S. government continues to pressure its allies to shun deals with China-based Huawei, the company may face less competition. Yet, as seen from the Samsung upset, it’s clear a fettered Huawei doesn’t mean Nokia splits the market with Ericsson.
However, you can argue this uncertainty is more than priced into shares. With its relatively low valuation, this out-of-favor stock continues to look like a bottom fishers’ buy.” That being said, just because shares are undervalued now doesn’t guarantee the stock would head lower in the coming months.
Shares Are Cheap, But Could Get Cheaper
Relative to its main rival, Ericsson, Nokia stock is cheap. Shares currently trade at a non-GAAP price-earnings ratio around 14x. By comparison, ERIC stock sports a forward non-GAAP P/E of 19.9x.
Granted, there’s good reason why this rival, with stronger prospects, commands a premium to this “also-ran.” Even so, this valuation gap may be too large of a discount.
Nevertheless, that’s far from being an invitation to buy at today’s prices. Why? Buying Nokia stock today may be like catching a falling knife. That is to say, investors trying to buy at the bottom could wind up with losses, as the stock keeps on trending lower.
Sure, at $4 per share, this stock looks like a steal from a valuation standpoint. But, what’s to stop shares from trekking lower, perhaps back prior lows? Yes, barring another pandemic-driven stock market crash, it’s not likely shares will fall back below $2.50 per share.
Yet, a better entry point could be around the corner. As investor confidence in Nokia keeps on slipping, a further pullback to $3 per share isn’t out of the question.
That’s not to say it’s time to go short. Far from it, given just a breadcrumb of positive news could send shares soaring again. While the bull case faces some challenges, there isn’t much of bear case to be made.
All that’s missing is a needle-mover. And until said needle-mover comes on the scene, there’s no strong reason to rush into Nokia stock today.
The Bull Case Remains, But Wait for Lower Prices
This telecom equipment maker’s prospects may not be as dire as the recent sell-off implies. But a reversal of the current bearish sentiment remains a work-in-progress. In the meantime, shares could head even lower from here.
In short, avoid the risk of trying to catch a falling knife, and hold off buying Nokia stock for now. The bull case remains, but there’s plenty of time to enter a position.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.