Is Nokia’s Failed Turnaround at the Edge of the Black Hole?

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There are turnaround companies, and there are companies that never really manage to turn their operations around. The latter category is facing a sad state of affairs at the end of October 2019 because U.S. investors have just seen the S&P 500 Index overcome all sorts of worries to hit all-time highs.

Nokia Corp. (NYSE: NOK) has become a company that just cannot ever seem to get its act together for shareholders. Its shares have continued to disappoint despite so many industry positives around the 5G buildout and despite companies figuring out that they might need to migrate away from Chinese technology companies for security concerns.

The latest bomb it dropped on shareholders came as a warning that stiffer competition in 5G spending was pressuring its margins. To preserve cash and to focus on opportunities, Nokia also communicated that the Finnish/French company would discontinue its dividend in order to devote its full resources to the 5G mobility business.

Here is the long and the short of the matter. Nokia has become a company that its shareholders just cannot trust. Despite high cash balances and trading closer to its implied book (asset) value, and despite merging with Alcatel-Lucent in recent years, the company’s shares have been an outright loser during the entire recovery period since the Great Recession. There are expected to be market winners and losers in the race to build out 5G networks. Unfortunately, Nokia is just not showing that the company will be a winner.

The timing of this drop could not be worse for Nokia. It was just on Monday that the S&P 500 hit an all-time high. Don’t tell it to Nokia shareholders, who are down 30% or so in the past week alone.

Nokia’s pricing pressure customers being resistant to paying up for new network technology is weighing on the company. Rival company Ericsson traded lower in recent days as well, but nowhere close to this extent. Many analysts have considered Nokia to be in great shape for a long-awaited turnaround to win from the coming 5G spending, and it routinely has shown up in our “Stocks Under $10 With Huge Upside Potential” feature for some time.

Nokia was downgraded to Neutral from Outperform in an overseas call by Credit Suisse, with the firm taking its target price down by one-third (to €3.85 From €5.70) as it faces sustained market share loss with limited margin expansion despite the long-term growth of 5G.

Argus, which has only a Hold rating here, has another warning about Nokia’s share price:

An additional risk in the NOK ADSs is that the price has now gone significantly below $5. Certain institutional investors are proscribed from owning shares trading below certain cutoffs, and $5 is a common threshold.

Merrill Lynch maintained its Buy rating but removed it from the US 1 List after earnings last week. The firm’s view is that Nokia’s third-quarter report was about as bad as it could get, even though the firm managed to maintain at Buy with a long-term view for investors. Its price objective went down from €6.40 to €5.20 (versus a share price of €3.62 at the time). While the Merrill report is noting trough valuations for the long haul, it warned that Ericsson is gaining share versus Nokia and that Chinese vendors are holding firm. It said:

Nokia has to increase 5G investments, the Huawei uncertainty is hurting the market, and weak FCF is driving management to pause dividend payments. Most issues will take a few quarters to fix and the stock may trade sideways near-term.

CFRA had a Buy rating as of Monday, but only with a $5 target price on its American depositary shares. Their view is that Nokia is well-positioned to benefit from the 5G investment spending cycle from telecom and communications providers over the next two years. That said, the firm also warns that Nokia’s profitability may face pressure. CFRA’s report said:

5G contracts are expected to be margin dilutive due to pricing competition and strategy to gain market share. Nokia’s 5G investment in its end-to-end strategy that comprises of solutions, products and services will likely to push out the margin recovery to 2021, in our view. While margin guidance cut is disappointing, we think a leading network equipment vendor such as Nokia should benefit from 5G investment cycle.

At some point, old technology companies with a long history of disappointment have very little room for trust and their credibility is more than fairly questioned. That is definitely the case regarding Nokia.

In New York trading, Nokia closed down about 5% more at $3.59 on Monday, and it was down about 1.8% at $3.53 on Tuesday heading into the noon hour. Nokia previously had a 52-week trading range of $3.58 to $6.65, and its consensus analyst target price from Refinitiv was $5.06.

The event horizon is deemed the point of no escape from a black hole. Nokia’s balance sheet might prevent it from immediate woes, but the downward pressure on earnings, margins and the cut to its dividend should be more than alarming at this time. Still, value investors have found out over time that it is hard for technology companies to sell themselves as “value” when established rivals and when younger and more nimble companies can add more pressure than ever. Even with a global slowdown, imagine how bad Nokia might be doing if the economy went into a real recession.


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