Hold Off on Nokia Stock Until It Proves the Comeback Is Real

Nokia (NYSE:NOK) stock has been performing remarkably well in 2021. In fact, NOK stock is up 56% in 2021. A large part of this rally happened within the past 3 months. That has many wondering — is Nokia at an inflection point now after a series of troubling years?

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

I would say yes and no. A lot of progress has been made but it must be sustained.

In 2021, Nokia seems to be focusing on many more business aspects than just mobile phones. This new focus for the company is both good and bad.

Let me explain.

NOK Stock Benefits From New Tech Focus

Many years ago, Nokia phones were considered among the best and had a large market share, especially before the arrival of smartphones. In 2014 Nokia sold its troubled mobile phone business to Microsoft (NASDAQ:MSFT). In 2016, HMD Global, another Finnish mobile phone manufacturer, started to use and promote the well-established brand of Nokia again. I admit that this is good news because Microsoft’s phones were horrible.

However, Nokia’s mobile phones in 2021 are far from a big hit. In fact, “Nokia was the 15th largest smartphone brand in Q4 2020 with a mere 0.7% market share.” Also consider its lackluster sales, where “Nokia smartphones continued to struggle on the European market, and captured less than 2% of market share, which is half of the shipments made in the same quarter last year.”

I’m not too optimistic for Nokia as a mobile phone maker. Still, there is some good news that you should be aware of.

First Nokia has introduced a line of new mobile phones, some of which are equipped with 5G technology. This variety of phones could help Nokia’s sales. The second and most important point is that Nokia is not just a mobile phone maker. It’s a technology company.

According to Yahoo! Finance,“[Nokia] operates through four segments: Mobile Networks, Network Infrastructure, Cloud and Network Services, and Nokia Technologies.” As such, Nokia offers many products for consumers other than phones. For example, it also sells TVs, audio headphones and speakers, smart home solutions such as Wi-Fi and smart lighting and several other accessories. Meanwhile, for businesses, Nokia has networks and industry solutions, valuable partnerships and ecosystems and licensing opportunities.

This business transformation is remarkable. Although there are risks and intense competition to contend with, its improved financial results have spurred enthusiasm in NOK stock investors more recently.

Strong Q2 2021 Results

Another important layer to the story behind NOK stock’s revival is the company’s recent performance. Specifically, the Q2 2021 results showed a strong first half and a revised outlook.

Some key highlights taken directly from the report include:

  • “Top-line strength continued in Q2, with constant currency net sales up 9% year-on-year, driven by growth across all business groups, with particular strength in Network Infrastructure. Reported net sales increased 4%.
  • Comparable operating margin of 12.8% (reported 9.1%) in Q2, with improvements across all business groups, also helped by the one-time software deal in Mobile Networks.
  • Q2 comparable diluted EPS of EUR 0.09; reported diluted EPS of EUR 0.06.
  • Generated positive free cash flow for the fifth quarter in a row; liquidity position remains solid with EUR 3.7bn net cash.
  • Considering our strong start to 2021, we revise our full year 2021 Outlook, including net sales expected to be EUR 21.7bn to 22.7bn (previously EUR 20.6bn to EUR 21.8bn) with comparable operating margin in the range of 10-12% (previously 7-10%).”

All of these metrics show a strong improvement over the past years and quarters. It seems that Nokia made a great choice when it was appointed back in 2020 Pekka Lundmark as President and Chief Executive Officer (CEO). The changes he’s made to the operating model seem to be be very effective.

The Bottom Line on NOK Stock

Adding a bit more meat to the bullish case is that Nokia has decided to invest in the 5G trend by developing the new ReefShark chipsets.

These chipsets are smaller and more efficient and enhance the performance of the 5G network. With key partnerships and the “gift” of Huawei being banned in the U.S. for security reasons, Nokia can advantage this gap and profit from it.

However, not everything is as glamorous as it seems for Nokia stock.

While Nokia has made progress in the last years to increase its operating margin and gross margin (and it has delivered a large positive free cash flow of $1.28 billion in 2020 compared to negative free cash flow in 2019), the the company reported a net loss of $2.52 billion in 2020 compared to a profit of $11 million in 2019.

As of 2016, the only year Nokia made a small profit was in 2019. So while there are some reasons for optimism, I am skeptical about Nokia. Also consider that its long-term debt has increased more recently too.

I would like to see sustained improvement in free cash flow and profitability. Until that occurs in the next few quarters or years, NOK stock is just a promising 5G play, but not a must-buy. It’s hard to be convinced now it is a bargain until its fundamentals improve.

On the date of publication, Stavros Georgiadis, CFA  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.

Article printed from InvestorPlace Media, https://investorplace.com/2021/08/hold-off-on-nokia-nok-stock-until-it-proves-the-comeback-is-real/.

©2022 InvestorPlace Media, LLC