On r/WallStreetBets, meme investing lifted otherwise weak firms higher this week. This phenomenon is a repeat of January – February’s short-squeeze when the group wanted to punish short-sellers. Nokia (NYSE:NOK) stock rose to as high as $9.79 at that time.
This time, NOK stock did not enjoy strong buying. The stock attempted to rally toward $6.00 but stalled.
What happened to Nokia’s stock rally? Why are buyers unwilling to accumulate this 5G communication equipment provider?
Nokia announced a flurry of rollouts, deployments, successful tests and other agreements in the last two months. This did not move the stock’s needle by much.
The company’s strong fourth-quarter results eventually helped shares trade higher. It posted revenue falling by 4.8% to EUR 6.57 billion. The operating margin was 7.2% and adjusted operating profit topped EUR 1.09 billion.
Conservative investors may wait for Nokia to post another quarterly earnings beat to indicate the turnaround is progressing.
AT&T will provide coverage of C-Band to 200 million people by the end of 2023. Markets hardly moved NOK stock. Shareholders are likely anticipating margins of no more than 10%.
As competition heats up, Nokia will face margin pressure from Ericsson (NASDAQ:ERIC). Ericsson typically posts better profitability, plus the stock pays a modest dividend.
Nokia suspended its dividend on Oct. 2019, alienating income investors.
Patent Licensing and NOK Stock
On June 1, Nokia and Daimler signed a patent licensing agreement. Revenue from intellectual property is usually irregular. It is also not the main contributor to quarterly results. Still, the deal aligns with Nokia’s strategy of monetizing its IP.
For now, Nokia will need to keep posting small wins. For example, its deal announcements like the one with DITO Telecommunity Corporation and this 5G-ready private LTE network to Equinor will eventually get the stock market’s attention.
Even Wall Street is unwilling to predict much upside in Nokia shares. Despite six “buy” ratings, analysts have an average price target of $5.69 (per Tipranks).
In a five-year discounted cash flow growth exit model, investors may build a fair value model for Nokia stock. Assuming a conservative perpetuity growth rate of around 3%, NOK shares are worth at least $6.40.
|Discount Rate||1.0% – 8.0%||9.00%|
|Perpetuity Growth Rate||0.038||3.30%|
|Fair Value||$37.17 – $8.29||$6.41|
Readers may click on the above link to increase the growth rate. This would model a more optimistic scenario for larger 5G contract sizes.
Currently, the fair value assumes negligible revenue growth from new deals. It also assumes free cash flow growth lagging in the near term.
In the last quarter, Nokia received prepayments from some of its licensees. That created a temporary lift in quarterly results.
In 2023, net sales will grow faster than the market, implying market share growth. To account for potential competitive pressures, investors should consider forecasting a single-digit growth rate instead.
When Nokia reports results in the next few quarters, look for adjusted margins increasing. If its adjusted operating margin exceeds the 10% – 13% range, then the stock’s fair value will rise.
The communications networking business is not a high-margin business. Unlike with software, rising hardware costs may hurt profits.
Still, Nokia improving software functionalities in its products. Its AirScale 5G mMIMO Base Station benefits from such enhancements.
Plus, customers benefit from better software on its System on a Chip. This would lead to higher satisfaction and will drive sales.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.