Why Nokia Is Fading From $5 (NYSE:NOK)

Investors are impatient. Markets view the multi-year increase in 5G network order growth for Nokia (NOK) as too slow. When Tesla (TSLA) rose ~75% in the last month just by splitting shares, Nokia’s paltry 2.5% return looks weak.

Nokia is not today’s high-flying stock, so it is not comparable to Tesla. Momentum chasing on stocks like Zoom (ZM) and Apple (AAPL) will work until it does not. Knowing when the party ends and the buying volume dries up is impossible. So, with Nokia dipping to $4.75 at the time of writing, value investors have another chance to buy the communication equipment firm at a modest discount.

Nokia’s Patent Claim

Last month, the International Trade Commission started an investigation in Nokia’s patent infringement against Lenovo (OTCPK:LNVGY). In the second quarter, patent licensing revenue for Nokia Technologies fell by 11%. Gross and operating margins remained steady in the last year.

Source: Nokia Presentation

If Nokia wins, Lenovo will have to settle or pay a fine, if its patents on the H.264 video compression standard on the ThinkPad, IdeaPad, and Flex lines infringed Nokia’s patent.

Strong computer sales, triggered by the pandemic lockdown and the “work from home” trend, drove Lenovo revenues higher. In the first quarter, revenue rose 7% Y/Y to $13.3 billion. When the USITC sets a target date for completing the investigation, the ruling may drive Nokia shares higher. Still, in Q2, the company was still in the top two position for 5G standard-essential patents.

Ex-CEO Rajeev Suri said on the conference call that “diversification continues as well and, as one example, we are seeing growing consumer electronics wins for OZO Audio, which is now in 31 devices, including Panasonic, OnePlus and ASUS.”

Lower brand licensing and lower patent licensing net sales due to expired patent licensing agreements hurt Nokia Technologies’ results. But if Nokia excludes one-time net sales, the Y/Y decline would have been 6% instead of 11%.

Opportunity

Nokia has existing licensing agreements that will keep IP revenue stable. Its research and development investment will pay off in the medium term. As the telecom industry transitions to 5G, Nokia’s IP revenue may grow from patent renewals.

HMD Global’s continued development on impressive budget smartphones will benefit Nokia. For example, the Nokia 3.4 device builds brand awareness. And while Apple has an impressive lineup of iPhone devices in hot demand, consumers who cannot afford it have an alternative. Growing unit sales of HMD’s inexpensive phones will have modest hardware improvements. The Nokia 3.4 is a follow-up to the late 2019’s Nokia 2.3. It will have 2GB of RAM, 32GB of storage, and run on a MediaTek Helio A22 chipset.

Nokia 3.4 is Coming: Renders, Specifications, and Speculation - WhatMobile news

In 5G, Nokia and Starhub (OTCPK:SRHBF) announced its first live 5G non-standalone network trial in Singapore. If the companies report a successful test, it is another milestone. Chong Siew Loong, Chief Technology Officer of Starhub, said,

“We continue to develop and advance our Network towards SA 5G through close collaboration with our trusted partners. To help us evolve quickly and easily towards 5G NSA, we chose Nokia’s Single RAN portfolio as it brings new capabilities, improved network efficiency, and end-user experience. We look forward to harness the full potential of 5G for Singapore.”

In Q2, Nokia reported uncertainties hurting its Asia Pacific region. Since this is due mostly to weakness in India, a rebound in the region and continued strength in Asian markets will lift Nokia’s performance.

Price Target

Analysts did not issue any report updates on Nokia in the last month. Four of the seven analysts rate the stock as a “buy.” The average price target suggests the stock has 14.29% in upside left:

Data courtesy of Tipranks

Analysts are likely too conservative in their outlook for Nokia. The company raised its FY20 adjusted EPS guidance already. With strong investments in R&D, a cost-cutting program ahead of schedule, and strong 5G wins ahead, operating margin could exceed the 9.5% guidance.

Based on its future cash flow, Stock Rover has a 24% margin of safety on Nokia stock:

Data courtesy of Stock Rover

The stock is still in value territory, but its 58/100 quality score will not improve until next year. When Nokia books more 5G revenue, that will change.

Nokia’s Momentum score may fall as selling intensifies:

Data courtesy of SA Premium

Nokia and Ericsson (ERIC) are still bullish ideas for the DIY value investor, as shown above.

With the summer coming to an end and elections ahead, speculators who scored big gains on the momentum stocks may take profits. This would only hurt Nokia stock, should markets fall. Conversely, buy and accumulate investors should look at the latest drop as another entry point.

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Disclosure: I am/we are long NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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