If you had Nokia (NYSE:NOK) more than doubling up the performance of the S&P 500 in 2021 on your investment bingo card, I tip my hat to you. True, NOK stock got a Reddit-fueled boost in early 2021. But for the last several months, the stock has been charging higher on something more sustainable.
When Nokia’s stock shot up to a closing high of $6.55 in late January, investors had low expectations for the company. It was evident that the stock was being lifted up by the meme stock mania that captured many stocks.
But like the crash from a sugar high, those gains didn’t last. That was because the underlying business was not generating revenue that supported a stock price of over $6 a share. However, NOK stock’s recent run-up is due to growing revenue.
That means the company’s recent growth may have some legs. At the moment, the analyst community believes that’s the case. The consensus price target is now $7.32, which would be a 35% upside from the stock’s current level.
A Pattern Is Developing In NOK Stock
Nokia delivered its fourth consecutive quarter of greater year-over-year (YOY) revenue growth. However, what has been even more exciting for investors is the YOY earnings growth in the first two quarters of 2021. The company is enjoying higher margins that has moved NOK stock out of neutral. And that has the attention of the analyst community, which now gives the stock a consensus price target of $7.32 per share.
The $12.52 billion that Nokia delivered in the first two quarters of the year has encouraged the company to raise its full-year guidance for between $25.74 to $26.93 billion. With several significant 5G contracts in place, further growth looks possible.
Is the Nokia Glass Half Empty or Half Full?
This is where it’s important to take a close look at the company’s fundamentals. For example, my InvestorPlace colleague Muslim Farooque recently pointed to Nokia’s 1.3x price-to-sales (P/S) ratio as a measure of the value in NOK stock.
That’s a glass half full outlook. But it’s important to look at such a ratio in a historical context. And in the case of Nokia, a 1.3x ratio looks about on par. That makes Nokia a low-growth company in a high-growth sector. That’s a fair reason for why NOK stock is trading at a discounted valuation to other companies in the sector.
Another fundamental metric that I find a little troubling is the company’s debt situation, as reflected in its debt-to-equity ratio. In fact, 81% of industry peers require less debt to finance their operations.
The Bottom Line on NOK Stock
When I last wrote about Nokia in March, I felt that revenue growth was the missing piece of the puzzle. At that point, NOK stock was trading right about at pre-pandemic levels despite the sector benefiting from a 5G tailwind for the better part of 2020.
However, due to several fortuitous circumstances, the 5G build-out is now helping the company deliver rising year-over-year revenue. And as revenue rises, so are expectations.
I’m not here to throw cold water on those expectations. The company is well positioned to gain business in China and throughout Europe. However as investors know what should happen, and what will happen, can be quite different. This is a sector in which Nokia will face more competition, not less.
And that’s the problem with carrying the privilege of expectations. The company in question has to deliver. Nokia has delivered two strong quarters and is deserving of its $7.32 consensus price target. However, it wasn’t long ago that sentiment wasn’t this strong.
If you’re looking at NOK stock as a short-term investment in 5G, I think you’re on the right track. But I’d caution investors about opening a long position until the company proves that more growth is on the horizon.
On the date of publication, Chris Markoch 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.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.
