Finland's telecom equipment developer Nokia Corporation (NOK) has led the 5G race from the start, establishing worldwide supply channels for equipment and microchip sales. However, with COVID-19 delays to 5G roll-outs and a global semiconductor shortage that is reducing the rate of equipment production, NOK has declined 12.4% over the past six months.
However, an online community of retail investors, powered by Reddit, took an interest in the stock in early 2021, helping it recover significantly year-to-date. Later, however, the Reddit community’s flagging interest in the stocks led to a 12.6% plunge in price over the past month.
With Huawei Technologies currently under federal scrutiny in Europe and the United States, NOK is the biggest name in the 5G space. However, the company’s relatively high volatility and poor financials are among the biggest concerns surrounding the stock, particularly as customers in many countries are expected to delay their 5G deployment plans until their economies return to their pre-pandemic levels.
Here’s what I think could influence NOK’s performance in the near term:
Weak Momentum
Except for a short-lived bull run triggered by the “meme stocks” rally in January, NOK has been declining over the past three months. The stock has declined 8.92% over the past nine months, while the industry has gained 38.5%. It is currently trading below its 50-day and 200-day moving averages of $4.31 and $4.15, respectively, indicating short-term bearishness.
The stock price decline is expected to continue because the stock was recently delisted from the Euro Stoxx 50. The removal of NOK from the leading blue-chip index in the European region is a severe hit to its reputation and brand value. Moreover, the development is expected to drive down the volume of investments made into the stock.
Market Competition
Because China's Huawei Technologies was kicked out of the 5G race by several Western countries, NOK became one of the biggest names in the space, with surging demand from Europe and the United States. While the company is still competing fiercely with Ericsson and Samsung, it currently controls approximately 20% of the global 5G market. NOK signed its 100th 5G deal in October last year. Though Huawei remains the leader in the 5G race worldwide, its technology deployment is concentrated in in China and other developing countries, given the tense relationships between the Asian giant and Western countries.
However, Ericsson enjoys more market support than NOK, as reflected in its price performance over the past year. Moreover, with Samsung upping its game to become a leading supplier of telecom equipment in the United States, NOK is looking at a tough battle for the title of leading supplier in the tech race.
Trading at a Discount
In terms of non-GAAP forward p/e, NOK is currently trading at 16.87x, 33.7% lower than the industry average 25.43x. The company’s forward price/sales and price/cash flow multiples of 0.89 and 13.85, respectively, are significantly lower than industry averages. NOK’s forward ev/EBITDA of 6.77x is 59.1% lower than the industry average 16.56x.
However, in terms of non-GAAP forward PEG, NOK is currently trading at 2.02x, 6.9% higher than the industry average 1.89x.
Consensus Price Target Indicates Potential Upside
Analysts expect NOK to hit $4.44 soon, indicating a potential upside of 9.9%.
POWR Ratings Reflect Uncertainty
NOK has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 factors, with each factor weighted to an optimal degree.
NOK has a grade of C for Momentum, Stability, Sentiment, and Quality. The company’s trailing 12-month gross profit margin of 37.56% is 21.7% lower than the industry average 47.95%. Also, its net income margin, ROE and ROA are negative, justifying its Quality grade. In addition, the company’s dizzying price fluctuations during the Reddit rally are reflected in its Momentum grade.
NOK is ranked #32 of 54 stocks in the B-rated Technology – Communication/ Networking industry. In addition to the grades I’ve highlighted, you can check out additional ratings for Value and Growth here.
There are 23 stocks in the Technology – Communication/ Networking industry with an overall rating of A or B. Click here to view them.
Bottom Line
Since exiting its cell phone manufacturing business, NOK has been investing heavily in its telecom equipment segment, and lately in the 5G division. However, coronavirus pandemic disruption and the recent semiconductor shortages have been playing a major role in the company’s recent decline. NOK reported a net loss of $2.97 billion in trailing 12-months, leading to a loss per ADR of 53 cents.
The company’s total assets have declined at a rate of 4% over the past three years. Hence, we think it advisable to wait until global supply chains are restored to pre-pandemic levels and the semiconductor space picks up pace before investing in NOK.
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NOK shares were trading at $3.80 per share on Friday morning, down $0.02 (-0.52%). Year-to-date, NOK has declined -2.81%, versus a 0.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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