It’s been a rough month for Nokia (NYSE:NOK) and its investors. Nokia stock dropped 17.3% of its value after missing expectations with its third-quarter earnings.
A disappointing third quarter for the Finnish telecom giant led to a massive sell-off, resulting in a 5.7% loss for the month. Consequently, the company has had to revamp its strategy and revise its outlook for the year.
However, it appears the market’s reaction to Nokia’s relatively disappointing quarter has been hysterical. The company is banking heavily on its 5G repertoire and has accordingly tailored its strategy. However, it is losing ground to its competition, keeping its stock price under the $4 mark.
Stabilizing its financial performance will be a significant challenge for Nokia and win big in the 5G race. In particular, raising operating margins will be especially tough as the company has recently slashed targets for the year.
Moreover, it faces stiff competition from Ericsson (NASDAQ:ERIC), Huawei, and others. Therefore, at least in the near-term, things ought to be challenging for Nokia.
Disappointing Third Quarter Results
Nokia reported its disconcerting third-quarter results late last month, prompting a sell-off in the stock market. Net sales were down 7% to 5.29 billion euros from 5.69 billion euros a year earlier. Revenues across all its segments were down across the board, with Networks, Softwares and Equipment down 7% and 14%, respectively.
Group Commons was the anomaly that reported a 17% growth, though it forms a relatively small portion of revenues. On the flip side, net profit surged to 203 million euros compared to 87 million euros in the prior-year period. However, growth in non-IFRS earnings was stagnant, and the operating margin forecast was slashed to 9% from 9.5% for the year. Margins for 2021 are even poorer at roughly 7% to 10%.
“Our financial performance in 2021 is expected to be challenging,” said CEO Pekka Lundmark, who talked about how the $6.6 billion Verizon (NYSE:VZ) deal lost to Samsung (OTCMKTS:SSNLF) dented its outlook for next year.
“We expect to stabilize our financial performance in 2021 and deliver progressive improvement towards our long-term goal after that,” he said.
Though next year should be challenging, Nokia aims to ramp up investments in 5G and establish itself as an industry stalwart in the long term. Moreover, it expects an earnings-based growing dividend of roughly 40% to 70% in the future.
The Battle for 5G Supremacy
Nokia’s future relies heavily on the success of its 5G plans. It signed off 17 new deals in the third quarter, taking the tally to 100. Despite the impressive numbers, it lags behind its competition, namely Ericsson and Huawei.
Nokia is losing out on its market share in the mobility market and now stands at 20%, down from 24% in 2017. Some experts even argue that the 5G shift has degraded the company’s position.
In turning its fortunes around, the management is looking to revamp its strategy. Under the new strategy, it will have four business groups and a more streamlined organizational hierarchy.
“We will ensure we are well-positioned to leverage these trends, improve our performance and position the company for long-term value creation,” Lundmark said, adding that the company will pull out all the stops to take the lead in 5G.
The recent loss of the $6.6 billion Samsung deal with Verizon comes as a significant blow. Additionally, Nokia has been unable to take advantage of the void left by Huawei in the international market.
The Chinese market remains highly competitive, with Huawei and other local companies ruling the roost. Regardless of the competition, Ericsson seems to be doing remarkably well in landing some major contracts accross the globe. Therefore, Nokia has to make up for a lot of lost ground for it to bounce back.
Final Word on Nokia Stock
Nokia is lagging behind the competition, and it senses that time is running out. It needs to invest heavily in its 5G ability and land some major contracts to stay in the race.
Ericsson, Huawei, and other companies are making some significant strides in the 5G space and continue to push through for greater market share. Hence, Nokia faces a tall order in maintaining its position in the sector, and at least for the near-term, it faces some stiff challenges.
Therefore, Nokia is not an attractive investment at this time.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.