The last time Nokia (NYSE:NOK) traded above $6 for more than a brief moment was 2017. Since then, Nokia stock has traded in a range between $3 and $5.
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The bullish argument for buying Nokia’s stock revolves around 5G and the number of deals it’s signed with mobile wireless carriers. On Oct. 2, Nokia announced it had secured its 100th 5G commercial contract globally, 17 of these contracts coming in the third quarter alone.
Its most recent win, a deal to supply BT Group (OTCMKTS:BTGOF) with its AirScale 5G RAN (radio access network) equipment and software, makes it BT’s largest equipment provider.
Although no terms were disclosed, it’s clearly a big win.
“We are thrilled to have passed this 5G milestone. We know we still have work to do and that the market remains highly competitive,” said Tommi Uitto, president of Mobile Networks at Nokia, in a statement. “But, we are moving fast – and these wins make it clear that our progress is being validated by customers.”
While Nokia’s moving slightly slower than Swedish competitor, Ericsson (NASDAQ:ERIC), which hit the centennial mark in August, it’s still an acknowledgment that Nokia will be a big piece of the global 5G puzzle.
This is why Nokia’s best chance to get to $6 or higher in the near term could come via a buyout offer from a larger company. Perhaps, even Microsoft (NASDAQ:MSFT).
Once Bitten, Twice Shy?
The last time Nokia and Microsoft walked up the aisle together was in 2013 when the latter paid $7 billion to buy the former’s handset business. Interestingly, current Microsoft chief executive officer Satya Nadella took the top job a little over a month into 2014. However, Nadella was head of Microsoft’s Cloud and Enterprise Group at the time and had little to do with the handset purchase.
In July 2015, Nadella made the tough choice to exit the phone business, taking a $7.6 billion charge against the business while also cutting 7,800 jobs. In hindsight, it was the beginning of a new era for Microsoft, one in which it focused on the things that were working for the company rather than the things that weren’t. Phones and handsets weren’t.
“We are moving from a strategy to grow a standalone phone business to a strategy to grow and create a vibrant Windows ecosystem including our first-party device family,” Nadella said in a July 8, 2015 email to employees.
Since that announcement, MSFT stock is up 368% through Oct. 2.
What Nokia Brings to the Table
First off, let me say that a Nokia-Microsoft tie-up isn’t my original idea. A 2021 prediction made by mobile analyst firm CCS Insight was brought to my attention by Forbes contributor Barry Collins, who does an excellent job covering consumer technology for the business news site.
Media plugs aside, CCS Insight believes that Microsoft and Intel (NASDAQ:INTC) are two companies likely to make a play for Nokia in the year ahead.
“We feel that Nokia could be slightly vulnerable to an acquisition,” Collins reports Kester Mann, CCS Insight’s director of consumer and connectivity, said about the Finnish 5G player.
“Microsoft has taken a real interest in the telecoms space. Already we’ve seen two acquisitions by them this year [Metaswitch and Affirmed Networks]… which is all about getting some expertise in the 5G and telco space and some contacts within industry. We believe Nokia could be a potential target for someone like Microsoft.”
And why not.
Nokia currently has an enterprise value of $20.6 billion. If Microsoft were to pay $6 a share, the enterprise value to buy it would rise to $32.3 billion. Microsoft currently has more than $136 billion in cash on its balance sheet. An acquisition of this size would not be a problem.
Were a price war to ensue between Microsoft, Intel, and possibly others, who knows what the final purchase price would be?
The bottom line is that Nokia does have something of value to Microsoft and it might be easier, in the long run, to buy its way into the top echelon of 5G players than develop organically from within.
The Bottom Line on Nokia Stock
When I last wrote about Nokia in August, I argued that if you planned to buy in the $5s, you ought to hold for two-to-three years to get a return on your investment. Well, Murphy’s Law set in. It’s fallen to $3.91 as I write this on Oct. 5.
However, as the company continues to gain 5G contracts in the fourth quarter of 2020 and beyond, its business will continue to strengthen, and its free cash flow will grow substantially.
Long term, I think it can get to $6 and beyond, but Microsoft might be its best chance to do so in the near term. Otherwise, shareholders shouldn’t expect to see $6 until 2022 or later.
If you’re a patient investor, buying in the $3s probably isn’t the worst idea.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.
