With its low valuation, and turnaround potential, it makes sense some contrarians have dived into Nokia (NYSE:NOK). But, its tepid performance so far in 2020 isn’t a case of Mr. Market calling it wrong. With the telecom equipment maker fumbling the ball time and time again, there’s good reason why this “also-ran” 5G play remains stuck in neutral.
The question is, will 2021 be the year it finally delivers?
With the U.S. elections in the rearview mirror, and the positive Covid-19 vaccine news potentially putting an end to novel coronavirus woes, Nokia could finally turn a corner. But, as seen from the recent earnings and guidance release, its doubtful next year will be a banner one.
Yet, while its “cheapness” may signal it’s more “value trap” than “deep value,” I don’t see it sinking much more from its current price level (around $3.90 per share). With so much negativity priced into shares, we probably won’t see prices plunge back to prior lows (below $3 per share).
On the other hand, lacking confidence it’ll finally turn itself around in 2021, a move back above $5 per share looks out of the question as well. So, what’s the play here? Instead of trying to bet on (or against) this floundering turnaround play, look elsewhere for opportunity.
Don’t Count on Nokia Stock Delivering in 2021
As I’ve previously discussed, 2020 has been all about 5G when it comes to this stock. Specifically, its ability to cash in on this megatrend. Sure, the U.S. Government’s desire to clamp down on China-based Huawei helped reduce competition.
But, it’s largely been names like Ericsson (NASDAQ:ERIC) and Samsung that have benefited from this development. And now, following the terrible quarterly earnings release on Oct. 29, it’s clear the coming year will be another one of disappointment.
How so? Yes, earnings-wise, quarterly numbers weren’t bad, as they were in line with analyst projections. But revenue numbers failed to meet expectations. Sales fell 7% compared to the prior year’s quarter.
However, what drove the big selloff post-earnings (shares fell 17.3% on Oct. 29 alone) was the latest guidance update. With operating margins now projected to remain in the single digits in 2021, it’s clear a near-term boost in profitability is no longer on the horizon.
Bottom line: Nokia may be back to square one when it comes to a turnaround. Sure, a new CEO at the helm (more below) could be a game-changer. But, the jury’s still out whether a change of the guard will put points into shares. And, while the stock looks cheap based on traditional valuation metrics, that alone doesn’t mean a big rebound is coming.
Deep Value or Value Trap? It Still Looks Like the Latter
One factor Nokia has in its favor is a low valuation. Shares trade at a sharp discount to rival Ericsson. But, don’t consider its low valuation a reason to buy. There’s a difference between “deep value” and “value trap.” That is to say, “deep value” stocks with catalysts have a shot at heading higher. Value traps? They can keep getting “cheaper” (i.e., head lower), as the underlying business continues to under-perform.
And “value trap” is the keyword with Nokia. Instead of showing improvement, so far in 2020, it has moved one step forward, but two steps back. 2021 is shaping up to play out in a similar manner.
Sure, with a new CEO at the helm (Pekka Lundmark), a turnaround that sticks could be just around the corner. But, as InvestorPlace’s Lou Carlozo wrote Nov. 13, the new CEO still needs to prove himself. He may have started his career at Nokia. But, he made his bones in the energy, not telecom, sector.
In short, if it quacks like a duck, it probably is a duck. And, if it looks like a “value trap,” it probably is one. However, does that mean it’s wise to sell, or even go short this dog with many fleas? I wouldn’t go that far. While the risk/return of going long isn’t much in your favor, going short isn’t that attractive, either.
It’s Too Tough to Make a Bull (or Bear) Case
Those who bought Nokia after March’s coronavirus crash may have seen quick gains, as investor enthusiasm briefly returned to this stock during the summer. But, since September, shares have been cratering back towards prior levels.
And with good reason. It’s clear 2020 isn’t the year this “also-ran” telecom equipment supplier turns itself around. And based on guidance, it doesn’t look like 2021 will be, either. Yet, with the stock still cheap on a forward multiple basis, there isn’t much lower it can go. This makes going short not that great of an idea.
So, if Nokia isn’t worthwhile as either a long (or a short), what is it then? Simply put, a name to avoid. Sit out on this floundering turnaround play, and look elsewhere for opportunity.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.