I can see why investors would be tempted to buy the dip in Nokia (NYSE:NOK). The sell-off since a disastrous third-quarter report has brought valuation back in line. The 5G tailwind that attracted investors to Nokia stock still exists. Yes, the news in the Q3 release was disappointing — but a lower price, in theory, could offset some of that disappointment.
That said, the case on paper has a very big problem in practice. Nokia stock simply can’t be trusted at this point.
The 5G tailwind was supposed to benefit results this year and next — not in 2021, as is now hoped. Market share is eroding. On paper, NOK stock does look cheap — but looking at the actual business, it seems increasingly clear that it should be.
5G and Nokia Stock
The Q3 earnings report unquestionably was disappointing. NOK stock fell nearly 24%, its largest loss in 19 years. Interestingly, the quarter itself came in ahead of analyst estimates. But it was guidance that led to the enormous sell-off.
Heading into the quarter, Nokia had guided for 2019 adjusted earnings per share of €0.25-€0.29, which was then set to grow sharply to €0.37-€0.42 in 2020. The outlook for both years was slashed after Q3.
For 2019, Nokia now sees adjusted EPS of €0.18-€0.24. That’s actually not that big a decline from original expectations for this year, particularly given that Nokia already had said after the second quarter that there were risks to meeting 2019 guidance. But in 2020, Nokia now sees adjusted EPS of just €0.20-€0.30. Adjusted operating margins are now expected at 8-11%, against a prior 12-16%.
The culprit was the company’s networks business and particularly its 5G portfolio. Those products were supposed to drive the growth and margin expansion Nokia projected, but that’s no longer the case. Nokia clearly is losing market share to Scandinavian rival Ericsson (NASDAQ:ERIC) as both companies try to take advantage of the political pressure being applied to Chinese rival Huawei.
As a result, Nokia is spending behind the business to try and lower prices and better compete with Ericsson, in particular. That rival has opted to lower upfront pricing in hopes of making up the profit through higher-margin service contracts. Nokia apparently has to match that pricing — but that’s not the only issue here.
Management and Execution Problems
I’ve long been skeptical of the turnaround case for Nokia stock for two core reasons. As I detailed earlier this year, this is a company with a long history of overpromising and underdelivering.
Last month’s news is just the latest in a long history of disappointments. And in that context, it’s hard to trust the new guidance going forward. Why is this time different?
Certainly, management isn’t inspiring any confidence at this point. CEO Rajeev Suri told Bloomberg in an interview that part of his company’s problem was that its acquisition of Alcatel-Lucent created “more work,” as the company had to migrate all of the legacy Alcatel-Lucent products to the Nokia nameplate. But that acquisition was completed three years ago, and certainly, Suri was aware of that issue when the company reiterated guidance in August.
This simply doesn’t seem like a management team on top of its business. It’s losing to Ericsson. It was just six months ago that Nokia was talking up the fact that it hadn’t lost a single 4G customer in the transition to 5G, and now it’s overhauling its go-to-market strategy. As Will Healy noted on this site, the company reportedly is losing Telecom Italia, with that customer going with Huawei and Ericsson.
From a broad standpoint, there’s another question. If Nokia can’t drive growth now, when can it? Huawei has been hampered, if not crippled, by security concerns. There’s really no other competitor besides Ericsson. And yet Nokia isn’t expecting much in the way of growth, even if guidance is met this time around.
Cheap Isn’t Enough for Nokia Stock
To be sure, NOK stock is cheap. The midpoint of updated 2020 EPS guidance, €0.25, translates to $0.277. That, in turn, suggests just a 12x forward multiple.
And so, again, there’s an aspect of Nokia stock that is tempting. The dividend has been cut to fund 5G investments, but management expects the payout to return at some point. 5G growth should continue. Huawei’s competitive positioning is at long-term risk.
But that’s not enough — and it’s not as if other networking plays don’t have bull cases themselves. Industry leader Cisco Systems (NASDAQ:CSCO) has sold off. Arista Networks (NYSE:ANET) plunged after earnings, and has its own “buy the dip” case. Juniper Networks (NYSE:JNPR) has shown long-awaited signs of life. Investors willing to step in to the sector have options beyond NOK stock.
The biggest issue here, however, is company-specific. Yes, Nokia has an opportunity for growth. But it also has a stock price at a six-year low because it hasn’t capitalized on past opportunities. It’s exceedingly difficult coming out of the Q3 release to believe that this time is different.
That’s why the NOK stock price fell 24% after earnings. It’s why it’s kept falling. Investors don’t trust Nokia, or Nokia stock. It’s difficult to blame them.
As of this writing, Vince Martin has no positions in any securities mentioned.