Briefly indulge me in an “I’m old enough to remember when” moment regarding Nokia (NYSE:NOK). I’m old enough to remember when cell phones initially started going mainstream, becoming affordable and smaller to boot. Back then, “then” being the late 1990s, Nokia was one of the dominant handset makers and Nokia stock was super hot.
In fact, if my memory is accurate, the Finnish company was seen as the purveyor of the “cool” phones, similar to Apple (NASDAQ:AAPL) today. My first mobile phone was a Nokia; the one where users could buy different colored fronts for the phone and swap out those pieces in the name of “style.” I’m also old enough to remember that there was a time when, on a split-adjusted basis, Nokia stock hovered around $60.
That was early to mid-2000. The shares closed at $3.52 last Friday. In other words, one’s morning latte could cost more than a share of Nokia stock and for those sensing an opportunity here simply because of the low price tag, I suggest some reading on the perils of low-priced equities.
In fairness to Nokia stock, it’s probably more structurally sound than a lot of companies dwelling in the land of sub-$5 price tags. Then again there are reasons why markets place those ominous price levels on some stocks and that is the case with Nokia as well.
Earlier this month, it was reported that Chairman Risto Siilasmaa is leaving the company, marking the second big departure among high-ranking executives at the Finnish company since October. Those moves are stirring speculation that the company is dealing with turmoil ahead of the epic global 5G rollout that’s coming in 2020.
Investors rarely reward c-suite turbulence and Nokia confirms as much as the shares are down 31.25% since the start of the fourth quarter.
“The company’s mobile network business has also seen managerial turbulence, with three managers leaving in as many years,” reports Bloomberg. “The unit’s current president, Tommi Uitto, was appointed in November 2018 after his predecessors, Samih Elhage and Marc Rouanne, both left the company.”
Investors mulling NOK stock may find themselves with trust issues, meaning trust in the ability of the company to execute in new frontiers, such as 5G. History doesn’t always repeat but remember: it was mid-2007 when the first iPhone came to market, but it was 2013 by the time that Nokia abandoned its handset unit, selling that business to Microsoft (NASDAQ:MSFT).
In other words, Nokia was slow to respond to the smartphone trend/threat and it appears the company has been sluggish in responding to 5G. That sluggishness has prompted management to ratchet down profit estimates in the name growth, something investors are showing little tolerance for this year, regardless of management’s reasoning for doing so.
Potentially pressuring Nokia is the fact that while the company has $5.83 billion in cash (as of the end of the third quarter), 5G investments are cost-intensive.
“In an analysis of one European country, we predicted that network-related capital expenditures would have to increase 60 percent from 2020 through 2025, roughly doubling total cost of ownership (TCO) during that period,” according to a study performed consulting firm McKinsey. “This conundrum raises important questions about investment strategy and future profits for mobile players.”
Bottom Line on Nokia Stock
Nokia may eventually prove to be a credible player in the 5G arena and there are avenues for the company to realize that potential.
“With its small-cell equipment widely regarded as topnotch, Nokia should benefit from the infrastructure change required to deliver mobile broadband content in most expeditious fashion,” said Morningstar in a recent note. “Although we believe Nokia should profit from its small-cell expertise, we also expect multiple equipment providers to keep this market subsegment competitive.”
Nokia has already cut its profit outlook for 2019 and 2020, so that bad news is already baked into the stock, but investors are in “show me, not tell me” mode with this stock, meaning management has some work to do to regain investors’ confidence and that’s no easy task.
In the meantime, there are better, safer avenues to 5G exposure for investors to mull than Nokia.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.