Nokia (NYSE:NOK) was one of the old-line companies that got caught up in the Reddit frenzy. But its gains were moderate – at least in comparison to companies like GameStop (NYSE:GME) and AMC (NYSE:AMC) – and brief. In late January, NOK stock shot up from $4 to a high of $9.79, but then it fell right back to $4.
Recently, however, it looks like the Reddit group has been lifting its favorite stocks again. But still, the gains of NOK stock have not been particularly large. Interestingly enough, however, earlier this year the stock reached its highest level in about a decade.
But the shares have been mostly a loser for investors for a prolonged period of time. That’s partly because the company has had major challenges transitioning from its smartphone business, which was disrupted by Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), to its new role as a telecom equipment operator. While Nokia’s focus on the 5G opportunity has been promising, the company has failed to execute well in this area.
Nokia’s Situation
In August 2020, Pekka Lundmark became the CEO of Nokia. He was actually an executive of the company back in the 1990s. But he then went on to lead Fortum, a global energy company. During his tenure there, he was successful in pulling off a restructuring and generated tidy returns for investors.
But his tenure at the helm of Nokia has gotten off to a slow start. In the company’s latest earnings press release, Lundmark set forth a dour outlook for the company, stating: “[A]s I said in Q3, we expect 2021 to be challenging, a year of transition, with meaningful headwinds due to market share loss and price erosion in North America. Additionally, as I said, delivering on our new operating model for a strong and sustainable long-term business requires us to make further 5G R&D investments in 2021, meaning we will sacrifice some short-term margin to ensure leadership in 5G.”
Consider that Nokia’s sales are expected to fall for the second year in a row in 2021. Analysts predict that the telecom company’s top line will drop 5.5% to 5.6% this year.
What is really troubling about this is that Nokia still has much work to do in order to revamp its technology, even though it has had a decade to develop a post-mobile phone strategy.
As a result, the company is likely to continue to lose market share to rivals like Ericsson (NYSE:ERIC) and Huawei. Even new entrants into the 5G market, like Samsung, have been making notable inroads in the space. Last year, the latter company was able to obtain a big contract with Verizon (NYSE:VZ),preventing Nokia from getting the deal.
The Bottom Line on NOK Stock
Some reports have suggested that Nokia could become a takeover target. Possible suitors include Microsoft (NASDAQ:MSFT) and Cisco (NASDAQ:CSCO). But that really does look like a long shot.
First of all, there would likely be much resistance to such a deal by regulators in Finland. The country considers Nokia to be a strategic asset. And the company still has to undergo more restructuring. Additionally, as time goes by, Nokia could continue to lose its competitive edge. So why would a buyer want to deal with those issues?
I don’t think, however, that Nokia’s situation is hopeless. Its valuation is reasonable, as its trailing price–sales ratio is only 0.83 times. The company may also resume paying a dividend as its cash flows improve.
But despite all that, investors may still want to be cautious about NOK stock, since this year will likely be tough for the company, as its competition will likely get more intense in 2021.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.
