Long-Term Investors Should Consider Buying the Dips in Nokia Stock

Stocks to sell

So far in 2020, Nokia (NYSE:NOK) stock is up over 15%. Yet that number tells only half the story. On March 18, NOK stock hit a 52-week low of $2.34. Now, it is hovering at $4.3. Put another way, if you were brave enough to invest $1,000 in the shares in late March, your investment would have gove over $1,800.

Long-Term Investors Should Consider Buying the Dips in NOK Stock

Source: RistoH / Shutterstock.com

Many investors are now wondering if they should chase the recent move up in the group. Therefore today, I’ll take a closer look at whether Nokia stock should belong in a long-term portfolio.

In the coming days, short-term profit-taking will likely push the stock toward or even $4. In case of such a potential price decline, market participants with a 2-3 year time horizon may consider investing in the Finnish technology group in the long run.

Nokia Stock May Become a 5G Winner

Many InvestorPlace readers will be familiar with how Finland-based company could not compete against the iPhone iOS and Android in the last decade. In the late 1990s, Nokia was the biggest phone manufacturer in the world. Yet, the company became a laggard in the transition to the smartphone market.

In 2013, Nokia sold its mobile business to Microsoft (NASDAQ:MSFT). Since then, it has been redefined itself as a networking company, and more recently, a 5G-equipment company.

The group now divides revenue in four segments:

  • Networks (around 77% of revenue)
  • Software (around 12% of revenue)
  • Technologies (around 7% of revenue)
  • Group common and other (around 4% of revenue)

Management is quite optimistic that going forward, 5G technology will likely drive Nokia’s growth. Yet in 2019, Nokia stock price suffered from slower-than-expected 5G equipment sales. Nokia stock started 2019 at about $6 and finished shy of $4, losing over 35%.

Although earnings in 2020 have not necessarily been cheerful, there has been an improvement over 2019. First-quarter results showed revenue of 5.36 billion euros. At the same time last year, revenue had been 5 billion euros. The reported loss came at €100 million compared with a loss of €442 million in Q1 2019.

The year-over-year improvement was primarily thanks to higher gross profit in networks and software segments as well as cost savings.

Nokia’s P/S ratio currently stands at 0.93. The metric puts the company at a favorable long-term position from a risk/return perspective. Coupled with the 5G growth prospects, it also gives long-term investors reasonable hope that the stock does not have to be mired in single-digit status forever.

Who Are Nokia’s Customers?

The group sells hardware to wireless carriers and licenses its patents to handset and chipset vendors. Its most valuable customers are communication service providers globally.

In 2019, Nokia signed several vital deals with major providers across the globe to introduce 5G networks in various countries, including Austria, Egypt, New Zealand, Norway, Saudi Arabia, South Africa, and Switzerland.

Also stateside, it has been in partnership with Sprint, which has now fully merged with T-Mobile (NASDAQ:TMUS), which is currently expanding its 5G reach, too. Network equipment by Nokia, as well as by Sweden-based Ericsson (NASDAQ:ERIC), is used widely in the U.S. market.

In recent days, Nokia also won two separate contracts with China-headquartered Baidu (NASDAQ:BIDU) and Tencent (OTCMKTS:TCEHY). Meanwhile, as we discuss the potential for growth in 5G for companies like Nokia, we’d need to pay attention to Chinese telecom giant Huawei, too.

It is is the world’s number one telecom supplier and number two phone manufacturer. The company started making headlines as it got caught in the trade war between the U.S. and China.

At present Huawei’s future in North America and Europe is not clear. In recent weeks, the U.K. has joined other western governments to announce that it will likely restrict access to Huawei. Therefore many analysts agree that Nokia can win more 5G contracts in these jurisdictions. And that would support Nokia stock in the new decade.

Profit-Taking Could Derail NOK Stock in the Short Run

In early Jan. 2020, Nokia stock was hovering around $3.8. Then came the sell off in early 2020, which took the price down to $2.34. And since then shares are up about 85%. As I write, they are $4.3.

Stockholders are understandably wondering if the share price can soon go back to January 2019 levels of about $6. However, as we get ready to finish the first half of the year, profit-taking may hit Nokia stock.

In recent days, volatility has come back to the markets. The recent rally we’ve witnessed in broader markets, especially in tech stocks, for the most part, reflects the belief in a V-shaped recovery for our economy.

However, if there were an upcoming change in investor sentiment on the rebound’s prospects, then these stock valuations would come down fast, and tech stocks like Nokia would likely be hit the hardest.

Are you an investor that also pays attention to technical charts? Then you may want to know that NOK shares have become overbought. Although a stock can stay overbought for quite some time, it is likely that some investors will soon hit the sell button in Nokia stock.

In the coming weeks, a pull toward $4 or even below is likely. But such a drop would also give long-term investors a better entry into NOK shares.

The Bottom Line on Nokia Stock

Have you been able to ride the recent wave up in Nokia stock? Then you may want to realize some of your paper profits. And if you believe that the share price may have become overvalued for now, you may want to look for opportunities in other reliable names in the market.

Potential investors may consider investing in the Finnish technology group for the long run in case of a potential price decline in NOK shares.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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