Nokia (NYSE:NOK) is working with NASA to put a 4G network on the moon. That little nugget of October news did nothing for Nokia stock. In fact, it’s lost 16% of its value in the two-and-a-half weeks since.
Nokia’s share price didn’t fall because it’s putting 4G on the moon; it fell because it lowered its 2020 profit outlook on Oct. 28.
In my most recent article about Nokia, I said that its share price would eventually get to $6, but likely not until 2022. In the meantime, buying in the $3s wouldn’t be the dumbest idea.
My argument was made before chief executive officer Pekka Lundmark — only in the top job since Aug. 1 — delivered its negative profit outlook.
As I said before, Nokia could end up in Microsoft’s arms (NASDAQ:MSFT) at some point. In the meantime, investors have to buy into the company’s new corporate strategy laid out by Lundmark.
Until that happens, it could have a hard time moving above $4. Here’s why.
Business Should Be Brisker
The mere mention of the moon reminds me of the scene from Dumb & Dumber where Jim Carrey’s character walks out of an Aspen bar and screams, “We landed on the moon,” after seeing a news clipping about the event on the bar wall.
And now, back to your regularly scheduled program.
Nokia’s third-quarter sales included sales of $6.22 billion and adjusted operating profits of $571.4 million, both lower than analyst estimates. As I stated, it also cut its guidance for 2020 profits, from a midpoint of 25 euro cents per share to 23 euro cents, with a midpoint adjusted operating margin of 9%, down from 9.5% earlier in the fiscal year.
Nokia expects its midpoint adjusted operating margin in 2021 to be 8.5%, 210 basis points lower than analyst estimates for next year.
A positive is that it expects free cash flow for 2020 of 600 million euros ($709 million). In 2019, it had negative free cash flow of 300 million euros ($355 million), so even with the reduction in its FCF guidance for the year, on a relative basis, it’s still doing okay.
It would be different if Nokia were paying a dividend. However, that’s paused until its cash position gets to approximately 2 billion euros ($2.4 billion). It finished the third quarter with 1.87 billion euros ($2.2 billion) in cash, so it’s on the cusp of resuming it.
The reduction in guidance could mean it won’t happen until sometime in 2021. Resuming the dividend would definitely put some air under Nokia’s share price.
Unfortunately, until Nokia’s CEO lays out the company’s complete strategy — the first phase was during its Q3 2020 release, the next phase is in December. The final piece will be covered at its Capital Markets Day in mid-March.
For now, a 7% decline in sales in the third quarter (3% excluding currency) is a disappointment at a time when Ericsson’s (NYSE:ERIC) third-quarter results increased by 7% due to strong sales in China, with a 124% increase in its operating income over the same period.
Ericsson’s doing a better job of taking advantage of 5G. It’s time for Nokia to pull up its socks.
How Does Nokia Stock Get Unstuck?
I’ve already mentioned two ways. It resumes the dividend, or it gets bought out by Microsoft or some other tech behemoth. Until then, investors will have to wait for more of its strategy to be released later in the year.
As it said in its Oct. 29 press release announcing its strategy, starting Jan. 1, 2021, Nokia will have four operating groups: Mobile Networks, IP and Fixed Networks, Cloud and Network Services, and Nokia Technologies.
Currently, Nokia has three reportable segments: Networks, Nokia Software, and Nokia Technologies. Essentially, the company separated its Networks segment into mobile and fixed access businesses.
In its strategy press release, Nokia points out that Mobile Networks generated 10 billion euros ($11.8 billion) in the past four quarters, followed by IP and Fixed Networks at 7 billion euros ($8.3 billion), Cloud and Network Services at 3 billion euros ($3.6 billion), and Nokia Technologies at 1.4 billion euros ($1.7 billion).
“Our focused business groups will ensure that we shorten the distance between customers and product development. Our new Customer Experience organization is designed to build on our deep customer relationships. We already have world-class teams and fully intend to keep this as a key strength going forward,” said Lundmark.
The Four Corporate Functions
In addition to the customer-facing sales and marketing function that will lie within the four operating groups, the company will have four corporate functions: Finance, Legal and Compliance, People, and Strategy and Technology.
These four corporate functions will ensure that each of its reporting groups has the tools necessary to grow Nokia’s business.
Lundmark is focused on the company not missing out on the 5G opportunity in front of it.
“When I look ahead, however, the good progress we have made is not enough. Our financial performance in 2021 is expected to be challenging, and more change is needed,” Lundmark stated.
“We have lost share at one large North American customer, see some margin pressure in that market, and believe we need to further increase R&D investments to ensure leadership in 5G. In fact, we have decided that we will invest whatever it takes to win in 5G.”
The Bottom Line
How fast Nokia’s share price gets to $4 depends entirely on its ability to convince investors its story is one of progress and not just a shuffling of the deck.
Buying in the $3s shouldn’t turn out to be a terrible investment if you’re a patient investor. It just might take a while to get tangible returns.
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.