With Nokia (NYSE:NOK) stock hammered by recent sell-offs, is now the time to buy? The telecom equipment also-ran has its work cut out for them. But while Huawei and Ericsson (NASDAQ:ERIC) may be ahead in 5G contracts, catalysts remain in motion.
For one, the U.S. government has an interest in propping up Nokia. Preventing China-backed Huawei from dominating 5G remains a top concern. More far-fetched ideas, such as a U.S. takeover of Nokia, seem rather absurd. But having America in the company’s corner remains a positive factor.
But that’s not all! With low expectations priced in, even partial success in 5G could help move the needle. A change in leadership could also improve odds of a turnaround. With shares trading at a discount to peers, upside potential may outweigh downside risks. Let’s dive in, and see why Nokia stock could be a buy at today’s prices.
Darkest Before The Dawn For NOK Stock
In a “winner-take-all” world, it’s tough to support the underdogs. Nokia is not the strongest name in its industry. But while this “fallen angel” likely won’t reach past levels of success, investors could still see upside if the company exceeds low expectations.
As InvestorPlace’s Faisal Humayun discussed March 4, Nokia faces many challenges in 2020. Competition for 5G contracts hurts margins. So does increased 5G-related investments. Supply-chain headwinds from the coronavirus add even more pressure. Yet, the expectations of reduced operating margins are already priced into shares.
It’s always darkest before the dawn. Nokia’s 5G investments could pay off. Even if they don’t dominate the space, they could still build a decent book of business. And with a new CEO taking the helm, the company’s prospects could be brighter. Current CEO Rajeev Suri’s announced exit may be cause for concern. But given the company’s poor performance, they have little to lose.
Incoming CEO Pekka Lundmark has yet to discuss strategic changes. But a changing of the guard could move the needle. As a recent MarketWatch article discussed, the ingredients for success could already be in place. Nokia is behind in 5G contracts, but not by much. The company has 68 deals worldwide, compared to 81 for Ericsson and 91 for Huawei.
The pressure is on Lundmark to execute the company’s 5G strategy. But, with shares trading at “worst-case scenario” levels, even a half-successful effort could mean upside for Nokia stock.
Despite Troubles, Undervalued Relative To Peers
While prospects remain uncertain, you can’t deny NOK stock is cheap. Shares trade for a forward price-to-earnings (P/E) ratio of 12.2. That’s on par with Cisco’s (NASDAQ:CSCO) forward multiple of 12.3. But compare that to Ericsson, which trades for 14.5 times forward earnings.
On an enterprise value/EBITDA (EV/EBITDA) basis, Nokia looks even cheaper. With an EV/EBITDA ratio of 6.2, the company’s valuation is well below Cisco’s EV/EBITDA ratio of 9.9. And far below Ericsson’s EBITDA multiple of 14.
Granted, Ericsson’s stronger business justifies a higher multiple. But, if Nokia beats expectations with its 5G strategy, expect multiples to move higher. Maybe not back to above $5 per share. But a move back to the $4 t0 $4.50 per share price level is within reach. In other words, 20%-35% upside from the stock’s closing price of $3.32 on March 10.
The company’s low valuation could also make it a takeover target. But don’t use this is your rationale for buying NOK stock. A merger with Ericsson seems like a logical move. But it likely wouldn’t get past antitrust concerns. The low-margin nature of Nokia’s business also means names like Cisco or Apple (NASDAQ:AAPL) aren’t waiting in the wings, either.
A sale of the company outright is a long-shot. Yet, asset sales remain an option. Besides freeing up capital, non-core asset sales would help further make Nokia a leaner operation.
No Slam-Dunk, But Nokia Shares Could Be Worth The Risk
Buying NOK stock today is no blue-chip investment. With Huawei and Ericsson outpacing the company in 5G deals, this floundering also-ran is a high-risk opportunity. But, this high-risk comes with high upside potential if things turn out better than expected.
Last year’s reduced guidance set the tone for disappointment. Yet, if Nokia can beat expectations, shares likely will move higher. While behind rivals, the company has a shot in building a decent book of 5G business.
Don’t expect shares to shoot up immediately. NOK stock could flounder in the current price range for some time. But, shares could move higher within the next year or two. Consider a buy, but don’t go overboard.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.