Retail investors inspired by the WallStreetBets subreddit are flocking to unloved stocks. In the process, these amateur traders have pushed GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) to unprecedented heights. However, some companies like Finnish multinational telecommunications giant Nokia (NYSE:NOK) are also strangely part of this unique phenomenon. NOK stock is up almost 50% in the last year. However, in the last three months, shares are losing steam.
That’s not to say that the company is a bad investment. It just means that the retail traders are looking elsewhere. In fact, shares of meme stocks like GameStop, AMC Entertainment, Koss (NASDAQ:KOSS), BlackBerry (NYSE:BB), and Express (NYSE:EXPR) have gained a respectable amount of ground in the last few weeks.
But initiating large positions in these stocks is fraught with risk. GameStop and AMC are examples of companies operating archaic business models. Fundamentals have nothing to do with their rise. But Nokia is distinct from these companies. It has successfully transformed itself into a 5G force. It has aggressively changed the way it does things.
I don’t mean to say that everything is perfect for Nokia. But the consumer electronics company is taking a disciplined albeit cautious approach, one that I have been a fan of for a while.
NOK Stock Is Attractively Valued
Nokia will forever be linked to its rivalry and subsequent loss to Apple (NASDAQ:AAPL) in the smartphone wars. However, the company has quietly forged a new path for itself as a 5G giant. You have to attribute a lot of this shift to the company’s management, which wants to make sure it doesn’t make the same mistake twice.
As of now, Nokia’s gross margin is at a very healthy 37.6%. The reported gross margin in the 2020 fourth-quarter was 39.2%, compared to 38.5% in Q4 2019. Importantly, Nokia’s cash performance was excellent. For the third consecutive quarter, free cash flow was positive. The Q4 cash flow came in at €2.5 billion, and benefited from an early customer payment of around €500 million, which was expected in Q1 2021.
No announcement was made regarding a dividend. In October 2019, Nokia’s board decided to pause dividend distributions. It makes NOK stock a no-no for income investors. In announcing its latest earnings, the company once again doubled down on this decision, saying that it needs to conserve cash for liquidity purposes and 5G investments. It’s a bitter pill for investors to swallow as they wait for Nokia to win the long game.
At its Capital Markets Day event, the Finnish vendor said it forecasts an operating margin of 10% to 13% in 2023.
Last year, the company exited China’s market for 5G radios. It failed to win any deals with operators. However, the company has outlined an aggressive strategy to reclaim a stake in China, which purchased 700,000 5G base stations, overshadowing rollouts in other regions.
Additionally, the Finnish telecoms giant will cut up to 10,000 jobs over the next two years as part of a restructuring program to increase spending on R&D and 5G capabilities. Nokia is hoping the initiatives will help it better rivals like Ericsson (NASDAQ:ERIC), which bagged up to a 12% share of Chinese 5G contracts last year. Ericsson made approximately $1.83 billion from China sales in 2020, a jump of 16% year-over-year. Certainly, there is a lot of catching up that Nokia has to do.
There are some other positive developments I would like to highlight here. Microsoft (NASDAQ:MSFT) and Nokia have inked a deal that will see the two collaborate on Microsoft cloud, Artificial intelligence (AI), and machine learning expertise. Separately, Nokia and Elisa are coming together to manufacture private mobile networks for Finnish enterprises.
My Bottom Line
Nokia has done well to position itself strongly in the 5G race. It has conserved a lot of cash and is mapping out a strategy to address areas of concern. I agree with my colleague, Will Ashworth, who has said that Nokia’s job cuts are not a signal of strength. He argues succinctly that companies who have expanded their workforce have also fared well in the markets. Increasing the headcount means a company is growing and on the move.
While I agree with this sentiment, Nokia has asked investors to be patient with their approach. It needs to consolidate its position in the telecommunications space since it cannot afford a repeat of what happened with its mobile phone business. In an interview with the Financial Times, Pekka Lundmark has said Nokia would do “whatever it takes to win in 5G”, which includes eliminating non-performing departments.
Its fundamentals remain rock solid, and its valuation is enviable. As of this writing, shares are trading at 17.1 times forward price-earnings. For all these things, NOK stock is a stable yet boring proposition that will not give you sleepless nights.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.