It may have been one of the stocks “memed to the moon” earlier this year, but the recent strong performance of Nokia (NYSE:NOK) stock isn’t because of a speculative frenzy from the Reddit trading community.
So, if not “meme” traders, who is behind its move from $4.20 per share in late April, to around $6 per share today? Investors who are buying it on its improved fundamentals.
After years of underwhelming performance, things are finally looking up again for the Finland-based telecom equipment operator. As previous also-ran to rivals Ericsson (NASDAQ:ERIC) and Huawei, Nokia finally improved its ability to win 5G supply deals.
It’s encouraging that this recent rally has been built on substance rather than hype. Yet does the stock have material room to run from here?
Yes and no. As the company continues to improve its profit margins, it could see a big increase in its earnings per share (EPS). In turn, this could give its share price another lift.
Given it is something that’s playing out at a slow-and-steady pace, expect further future gains to happen more gradually. It’ll be a while before it has a shot of hitting its “meme stock” high of $9.79 per share again.
Strong Results and the NOK Stock Rally
Nokia may still be associated with the “meme stock” phenomenon. This trend may have sent shares soaring back in February. Since then, though, the stock’s been moving instead on company-specific factors.
For example, it began to trend higher again starting in late April, after it released strong results for the fiscal first quarter of 2021.
Thanks to its more recent quarterly results released in July, it has been able to extend this rally. Handily beating on earnings, and upping its 2021 guidance, it’s clear the company’s comeback is fully in motion.
Before, when it came to winning 5G equipment supply deals, Nokia was a distant third, behind China-based Huawei and Sweden-based Ericsson. To some extent, thanks to the blocking of Huawei equipment sales in the U.S. and several of its Western allies, this company has been able to win more 5G deals than in the past.
Recent results also indicate the company’s cost reduction measures are paying off as well. As InvestorPlace’s Faizan Farooque wrote, cost-cutting is another area the company has focused on with its turnaround. Further improvements in this area, coupled with improving sales, may help fuel additional gradual gains for this stock in the years ahead.
Investors who got into NOK stock after its “meme stock” pullback in March and April have seen big gains in a short period of time. However, don’t expect a rapid run-up to happen again from here. That is, investors diving in today at $6 per share shouldn’t expect it to soar back up to its 52-week high of $9.79 per share anytime soon.
Instead, Nokia shares will continue heading back toward this high, but it will likely happen at a more gradual pace. Perhaps it plays out over a one- or two-year time frame. Following its run-up, it appears this once “also-ran” in the 5G equipment industry has caught up valuation-wise to the main publicly traded play in this space, Ericsson.
Both stocks trade at similar forward price-to-earnings, or P/E ratios (16.7x for ERIC, 16.1x for NOK). As its forward multiple is in line with peers, earnings per share (EPS) are going to have to come in far above current consensus (38 cents in 2021, 39 cents in 2022) in order to send shares significantly higher from here.
It may not be until 2023 that Nokia’s profitability sees another big boost. That’s the year the company said back in March it anticipates seeing its operating margins falling firmly in the double-digits.
That doesn’t mean you need to wait two years for shares to make a big move once again. The stock could continue to trend upwards, in anticipation of higher levels of profitability. Just keep in mind that likely means a slow and steady ride from here.
Buy Now Ahead of Further Gradual Gains
No longer one of the most talked-about stocks on Reddit’s r/WallStreetBets subreddit, it’s a stretch to say “meme stock” madness does much to drive Nokia shares higher or lower anymore.
Improving fundamentals, not Reddit hype, has been the driver of the recent NOK stock rally. That may mean shares are at little risk of pulling back. But with its next big leap in profitability not anticipated until 2023 it may take time for it to move significantly above where it trades today.
On the date of publication, Thomas Niel 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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
