Broadly speaking, Nokia (NYSE:NOK) isn’t performing terribly this year. But amid the 5G rollout, which was supposed to be a catalyst for the company, Nokia stock is disappointing with a tepid 2.70% year-to-date gain.
For a year now, Nokia is vexing investors, trading in a range of $2.34 to $5.14. The bottom occurred in March when equities around the world swooned in the wake of the novel coronavirus pandemic. Alright, so give Nokia stock a pass on that because, for the span of a few weeks in March, nothing was working.
The Finnish telecom gear manufacturer subsequently rebounded. But its declines since late August were steady and precipitous. The declines culminated in a substantial late October swoon after the company slashed its 2020 earnings outlook. Making matters worse, Nokia said it will miss the profit bar set for 2021. Now, Nokia is forecasting operating margins of 7% to 10%, down from previous guidance of 10% or higher.
Nokia compounded investors’ woes by disclosing on its third-quarter earnings conference call that it lost Verizon Communications (NYSE:VZ) as a customer. That’s some concerning news right there as is Nokia’s pesky inability to contain cost pressures on 5G contracts.
Nokia Stock Needs a Facelift
For a mature company, Nokia seems to be consistently in flux. New CEO Pekka Lundmark was supposed to steady the ship when he took over this year. And, he may ultimately prove successful. However, this isn’t going to be an overnight transformation. Lundmark clearly inherited a company with some issues.
There’s no debating that. Over the first 11 months of 2019, Nokia stock was cut in half and its annual performance only improved in the last month of the year. That came on the back of news relating to Lundmark assuming the chief executive spot.
In plain English, Lundmark has his work cut out for him. In order for him to deliver for Nokia investors, he’s got to be bold. The plan is to reshuffle Nokia’s operating scheme into four independent units. This is an effort to boost margins and accountability while getting the company away from dependence on end-to-end solutions. Ultimately, this gambit could be a much-needed step in the right direction. But, it’s one that’s going to take time to pay dividends. And, investors could be running short on patience.
That patience is further frayed when considering Nokia cites the pandemic for its 2020 struggles. That’s not commentary investors are hearing from Swedish rival Ericsson (NASDAQ:ERIC). Adding to the bad optics for Nokia is that Ericcson is topping its Finnish competitor by a margin of better than 12-to-1 this year.
Some Bright Spots
For investors with measured expectations, the case for Nokia isn’t a total wash. The company holds $2.2 billion in cash, which indicates its previously eliminated dividend could be restored.
Additionally, the stock isn’t expensive. Some analysts make the case Nokia is actually undervalued, somewhat, and offers upside to $4.50. That implies upside of 18.4% from the Nov. 13 close.
Again, it’s a matter of how long investors are willing to wait for bright spots to materialize. The near- to medium-term outlook with Nokia is murky.
“Nokia now expects to underperform its primary addressable market for 2020 and for 2021 to be challenging,” according to Morningstar. “The company is still being hampered by cost pressures for 5G contracts and expects to ramp up its development investments in 2021 to extract costs and increase its competitiveness for 5G contracts ahead.”
Lundmark’s four-unit isn’t a quick fix and with rivals showing 5G success, Nokia needs to assuage skittish investors and do so sooner than later.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.
