Buy Nokia Stock Despite the 18.5% Bounce from Lows

In hindsight, Nokia stock (NYSE:NOK)  peaked in the summer when markets expected 5G revenue growing without question. Instead, losing the Verizon Communications (NYSE:VZ) business to a newcomer shook investor confidence. Samsung (OTCMKTS:SSNLF) won a big network supply deal, while probably offering a steep discount.

a backdrop featuring the Nokia (NOK) logo with a mobile phone featuring the Nokia logo on its screen in the foreground
Source: rafapress / Shutterstock.com

Nokia stock is a disappointment after peaking at $5.00 in August. Yet news of the company’s strong prospects come in a lumpy fashion. Investors may take advantage of the company’s weak quarterly report as a chance to buy more shares. Competitor Ericsson (NASDAQ:ERIC) trades at twice the market capitalization of that of Nokia. This suggests that Nokia’s discount on the market will not last.

Deals Lift Nokia Stock

In the last month, Nokia rebounded by 20% ahead of several key supply deals. For example, the United Kingdom banned the installation of new Huawei 5G equipment. This opens up Nokia’s market share potential in the region. Nokia and Ericsson already picked up a few contracts that would replace Huawei’s equipment. Together with the government’s investment in smaller players, Nokia’s growth in the U.K. will help offset the Verizon 5G supply loss.

On Nov. 30, Nokia announced that Togocom, an African mobile operator, selected it to deploy 5G across the country. The three-year deal will see the telecom firm buying equipment from its AirScale portfolio. This includes AirScale Base Stations, MIMO Adaptive Antenna, and AirScale Micro Remote Radio Head solution.

Shares Rebound After Weak Q3 Report

Nokia traded at below $3.50 following its weak third-quarter report. Net sales fell 7% year-on-year, hurt by lower services within the Mobile Access division. Conversely, margins expanded, helped by Mobile Access and Optical Networks. Nokia Enterprise also grew Y/Y. The strong free cash flow in Q3 is the fifth quarter in a row. After increasing by around EUR 0.3 billion, Nokia held approximately EUR 1.9 billion in cash.

The continued growth in cash flow suggests that Nokia is in a good position to restore its dividend next year. Buying back shares at these levels might benefit investors, instead. At these price levels, Nokia could lower the shares outstanding. Income investors already dumped the stock at the $2.50 – $3.50 range in 2020. So, management does not need to declare a dividend yet.

Cost-Cut Efforts Needed

Losing the Verizon contract will put pressure on profit margins for 5G hardware. To increase its efficiency, Nokia may need to cut staff and increase research and development activity. This will add to its near-term costs and delay the dividend declaration.

On Wall Street, five analysts rank the stock as a “buy.” Based on 10 analysts offering a stock rating, the average price target is $4.48 (according to tipranks). This not far from the fair value offered on Stock Rover:

Nokia stock score on Stock Rover

Nokia stock score is strong on value and quality but not growth.

Chart courtesy of Stock Rover

As the scores show above, Nokia is a quality stock with deep value. Its growth is only average for now: the company last scored a high growth score eight quarters ago. It will need to keep taking more business that Huawei is losing. More importantly, it cannot lose those deals to Ericsson. Fortunately, its reputation for good quality, reliable 5G products will help Nokia stand out from the competition.

Risks and Your Takeaway

Ciena’s (NYSE:CIEN) quarterly earnings report, scheduled for Dec. 10, may shine some light on the health of the network market. Cisco Systems (NASDAQ:CSCO) posted better quarterly results last month, which suggests the sector has better prospects than the stock market expects.

Nokia is especially compelling because of its deep value at these levels. The lack of consistent quarterly earnings strength creates a discount for patient value investors. Despite shares rallying by 18.5% from the post-earnings selling, investors should consider buying it at these levels.

Disclosure: On the date of publication, Chris Lau held a LONG/SHORT position in NOK.


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/buy-nokia-stock-despite-the-18-5-bounce-from-lows/.

©2021 InvestorPlace Media, LLC