I drew the Nokia (NYSE:NOK) card today. With all the 5G discussion lately, it’s easy to see why NOK stock is up 24% in the past month. The question is whether it can keep up the momentum.
It’s not surprising that investors have soured on the Finnish telecom hardware and software provider. If you bought $1,000 of Nokia stock toward the end of September 2011, including dividends, you’d have $1,000 today.
Talk about opportunity cost.
It would have been hard to fathom in 2007 when Nokia was trading in the $30s, that investors would be staring down the barrel of negative returns over such an extended period. Yet here we are.
Before you invest any of your hard-earned capital, if you’re truly serious about dropping some cash on Nokia, first, you might want to consider what the next nine years will look like before doing so.
Call it your “margin of safety” thought.
NOK Stock as a Speculative Bet
The keywords in this headline are “speculative” and “bet.”
If the funds you are using to buy Nokia are in a tax-advantaged registered account, stop reading this article NOW and do something more productive with your time. Nokia hasn’t earned the right to be a part of your retirement or education fund for the kids. It just hasn’t.
Now, if you’ve got a fun-money stash that you use for ideas like this one, I’m OK with you continuing to read my article.
In November, I suggested that Nokia stock would get to $6 sometime in 2022. For all I know, it could do it next month if Microsoft (NASDAQ:MSFT) or some other tech giant decides it needs to make a large acquisition for no good reason.
The point is: I don’t believe even speculative investors ought to expect double-digit returns over the short run for the simple reason that Nokia’s had a tough time staying above $4 with any consistency in the last couple of years.
It tried in August, notching 15 out of 21 trading days over $5, falling back into the $3s by the middle of September, a price point that should be attractive to speculative investors.
If Nokia didn’t have more than 200 commercial 5G networks expected to be in operation by the end of this year – more than double what it had at the end of 2019 – I would suggest even speculative investors take a hike.
The reality is that Nokia continues to be a resilient player in the 5G game. Every time it looks ready to throw in the towel, it wins a contract that suggests chief executive officer Pekka Lundmark is the person to turn the company around.
But it won’t be easy.
Free Cash Flow Is the Key
Where the situation applies, I love to use free cash flow metrics to get a sense of a company’s progress. In October, I suggested this would be a key indicator that Nokia is on its way back.
“[A]s the company continues to gain 5G contracts in the fourth quarter of 2020 and beyond, its business will continue to strengthen, and its free cash flow will grow substantially.
Long term, I think it can get to $6 and beyond, but Microsoft might be its best chance to do so in the near term. Otherwise, shareholders shouldn’t expect to see $6 until 2022 or later,” I wrote on Oct. 7.
“If you’re a patient investor, buying in the $3s probably isn’t the worst idea.”
Now let’s apply free cash flow to Nokia’s past to get an idea of what the next nine years might bring.
In the trailing 12 months ended Sept. 30, Nokia had 1.94 billion euros ($2.36 billion) of free cash flow. That’s higher than at any time in the past four years. The question is, how does it compare to its heyday.
In 2007, when trading above $40, it finished the fiscal year with an FCF of 7.17 billion euros ($10.5 billion). Based on 3.93 billion shares outstanding at the time, net debt of 10.81 billion euros ($15.8 billion), and a $40 share price, Nokia had an FCF yield of 6.1% based on an enterprise value of $173.0 billion.
I consider anything above 8% to be value territory. So, even at $40, it likely appeared to investors that Nokia was trading at a reasonable price. That said, free cash flow can disappear in a flash.
Based on Nokia’s current TTM FCF, Nokia’s FCF yield is 11.2% – $2.36 billion divided by enterprise value of $21.0 billion – almost double what it was in 2007.
The Bottom Line
Lundmark, who only started as Nokia CEO on Aug. 1, has been very candid about the company’s deficiencies and how it’s affected its 5G plans. On Dec. 16, he’ll provide the second phase of its restructuring along with its third-quarter results.
I suggest you read this article from Mobile World Live content editor Chris Donkin if you want to get an idea of the enormous challenge that Lundmark faces internally and externally in 2021.
If you’re a speculative investor, I recommend that you buy NOK stock in the mid-$3s. If you’re really aggressive, you might buy some now to get in before earnings at mid-month and then reassess after its Dec. 16 update.
For the rest of the readers, the next nine years are going to be challenging for Nokia. I’d look to other stocks for long-term inspiration.
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.