With the Credibility Suck Impacting Nokia, You Should Stay Away From the Stock

Heading into its recently disclosed third quarter of 2020 earnings report, Nokia (NYSE:NOK) had much potential. Sure, it raised eyebrows because of historical missteps. But with Chinese telecom giant Huawei sidelined due to geopolitical rumblings, Nokia stock also had upside potential. Naturally, it was going to be a speculative bet but one with some justification. However, that may have all but evaporated with the Q3 results.

a backdrop featuring the Nokia (NOK) logo with a mobile phone featuring the Nokia logo on its screen in the foreground
Source: rafapress / Shutterstock.com

On paper, the devastation that Nokia stock incurred – it fell over 17% on the Oct. 29 session – seems over the top. The telecom equipment specialist delivered earnings per share of 6 cents, just a penny below the consensus EPS estimate. To be fair, the revenue miss was uglier, with reported sales of $6.2 billion below the $6.4 billion forecast.

Even here, the miss wasn’t completely unexpected. After all, the forecasted revenue spectrum was between $5.9 billion to $6.6 billion.

However, the news got progressively worse in the granularity for Nokia stock. First, Nokia reduced its profit outlook for the year, anticipating operating margins of 9%. Previously, management had forecasted 9.5%. That in itself wouldn’t be too awful. Unfortunately, the company also downgraded its 2021 operating margin target to between 7% and 10%. In contrast, analysts anticipated that the target would exceed 10%.

To top it off, Barron’s contributor Steve Goldstein wrote that “Nokia also withdrew its long-term guidance of between 12% and 14% operating margins in three to five years, saying it will offer a new outlook at its capital markets day in March.”

Predictably, Wall Street was none too happy with the telecom equipment maker, plummeting Nokia stock. While this was new CEO Pekka Lundmark’s first quarter, sentiment did not mitigate the trading action. And that likely was due to what Lundmark stated. Frankly, he appeared to glean some strategies off President Trump’s playbook, which didn’t help matters, as I’ll explain.

Excuses Leave Many Wondering About Nokia Stock

In my view, it wasn’t the numbers for Q3 that hurt Nokia stock. Instead, it was the many excuses that management forwarded – along with not providing long-term guidance for operating margins – that drew skepticism. Really, it’s the credibility suck that recently doomed NOK.

First, Lundmark explained the guidance disappointment that was disclosed to losing market share because of a “large North America customer.” Fair enough. Back in early September, APnews.com reported that Samsung Electronics will develop 5G network infrastructure for Verizon Communications (NYSE:VZ) in a contract worth $6.65 billion.

Undoubtedly, losing that potential deal hurt. Not surprisingly, then, Nokia stock, along with rival Ericsson (NASDAQ:ERIC) printed red ink around the time of the announcement. But the problem is that this was a well-known negative that had been priced in. So that doesn’t explain the huge volatility that overwhelmed NOK following its Q3 results.

Second, management emphasized that the novel coronavirus pandemic hurt the telecom equipment market. At first glance, this seems a reasonable statement. With many companies experiencing headwinds in their revenue channels due to the lockdowns and other restrictive policies to combat Covid-19, re-upping infrastructure doesn’t seem to make much sense.

But drilling into the details, Covid-19 should be the perfect catalyst for Nokia stock. Well before this crisis, we all knew how vital 5G was as it represented the foundation for future technologies. Moreover, with the pandemic, this narrative grew stronger.

As KPMG points out, the shelter-in-place orders that occurred earlier this year turbocharged demand for streaming entertainment. Companies like Netflix (NASDAQ:NFLX) and Disney (NYSE:DIS) saw dramatic demand for their streamed content services. As well, the sudden integration of work- and study-from-home platforms into our daily lives bolstered demand for telecommunication upgrades.

If these tailwinds weren’t enough, companies saw how dependency on China may not be in their best interests. Therefore, many have turned to trustworthy western companies to build out their 5G infrastructures. That should have been a catalyst for Nokia stock.

Instead, Lundmark and President Trump have basic ally adopted the same message: Covid, Covid, Covid. For both individuals, the coronavirus could have been an opportunity to demonstrate leadership. Instead, they’ve used the pandemic as an excuse.

Generally, people don’t like excuses, especially from high-level folks and certainly when money is involved. Thus, I’m not surprised that Nokia stock dropped the way that it did.

Credibility Busted

Now, I don’t want to portray Lundmark as a chief executive that’s bumbling around in the dark. He was tasked with the unenviable task – compensation aside – of bringing a troubled company to recovery. Further, it is his first quarter, and the pandemic has been awful for the world.

Unfortunately, the optics are unfavorable. Ericsson’s shares are up nearly 27% for the year, while Nokia stock is down over 9%. As well, Ericsson isn’t using the Covid-19 crisis as a crutch.

What this boils down to is that credibility for NOK stock is likely busted. With the reduced expectation along with the withdrawal of long-term guidance, investors are nervous that the underlying company doesn’t have an answer for the new normal, even though it should have at least some positive things to say.

At this point, most investors are better served sitting on the sidelines. Even the speculators might see this as a risk no longer justified.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

Article printed from InvestorPlace Media, https://investorplace.com/2020/10/nokia-stock-could-have-been-great-again/.

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