Consider Nokia Stock a Cautious Buy Ahead of Earnings

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With shares up nearly 83% off their lows, what’s next for Nokia (NYSE:NOK) and Nokia stock? After rallying in the spring, shares have tread water between $4 and $4.50 per share. But, with multiple tailwinds in motion, better-than-expected quarterly results could mean shares get back on track and head higher.

Nokia stock

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Or does it? While Nokia’s fortunes have improved over the past year, the company still can’t shake off its “also ran” status. This means that after years of dropping the ball, the telecom equipment company has fallen far behind. Rivals like Ericsson (NASDAQ:ERIC) and Chinese-based Huawei have locked up the lion’s share of the market.

Sure, with the U.S. government pressuring allies to ban Huawei, the company may be able to gain additional market share. Yet, this “China catalyst” comes with major caveats. Shares are also undervalued relative to peers. As some have pointed out, it’ll take top-line growth to convince investors to give shares a richer valuation.

Nevertheless, while not as much of a screaming buy as it was back at its novel coronavirus lows, there’s still some potential left on table. Even if results (set to be released July 31) disappoint, a cautious buy at today’s prices may still be a solid long-term entry point.

Nokia Stock and Q2 Earnings

What should investors expect in terms of earnings for the recent quarter? Analyst consensus calls for earnings around 3 cents per share and sales of $5.7 billion. Given that earnings last quarter fell in-line with estimates with sales slightly falling short, it’s hard to say whether investors should expect disappointment or surprise.

In short, catalysts in motion may not have paid off in the prior quarter. But they could produce stronger-than-expected results in the quarters ahead.

What am I talking about? Beyond the continuing 5G catalyst, rising tensions between the U.S. and China could also move the needle.

As InvestorPlace’s Josh Enomoto wrote July 28, the U.S. Government’s pressure on western allies to shun Huawei could mean market share growth for Nokia. Granted, this too has been an ongoing catalyst. But given recent events (such as the Houston and Chengdu consulate shutdowns), the potential for this needle-mover could be accelerating.

But, with a few caveats. As Enomoto noted, while China is a small market for the company, it has significant manufacturing operations there. In short, the company could be caught in a bind when it comes to exporting its products out of China.

However, don’t take that to mean you should write off Nokia stock as a buying opportunity. Despite the “China catalyst” potentially being a mixed bag, shares still offer value. Even after their post-pandemic rally.

Despite Rally, Shares Remain Undervalued

As mentioned above, Nokia stock has rallied about 83% since March’s pandemic-driven sell-off. Given shares tumbled as the outbreak hit America, shares today aren’t much higher than where they were at the start of 2020.

In other words, it’s possible markets have yet to price-in all of Nokia’s growing potential. Just based on valuation metrics, shares look cheap. That’s part of the reason Raymond James’ Simon Leopold remains a bull.

The analyst gives the stock a “strong buy” rating and a $5.50 price target. That’s more than 28% above where shares trade today. His rationale? Shares right now remain cheap due to what he calls “investor hate.” That is to say, Nokia’s poor reputation earned from years of bad management is why shares continue to trade at a low valuation.

With a new management team at the helm along with the 5G and China tailwinds, the company could win back the love of investors. With this in mind, buying today, even as shares remain well above their lows, could be a great opportunity.

On the other hand, there are merits to a “wait-and-see” approach. As this commentator recently wrote, the “year of 5G” has yet to translate into sales growth for Nokia. Despite shares being undervalued, multiple expansion won’t be in the cards until the top line sees a boost. With the commentator seeing limited upside above $5 per share, they recommend buying only on dips.

Consider Nokia Stock a Cautious Buy Ahead of Earnings

Despite improving fortunes, it’s fair to say this company still has a few fleas. The 5G catalyst could help move the needle. But so far, it’s done little in terms of sales growth. Deteriorating U.S.-China relations may give the telecom equipment supplier a boost, but its exposure to Chinese-based manufacturing could put them in a bind.

Also, shares remain cheap, but Wall Street continues to take a “show me” stance. If the company surprises with earnings and guidance, shares may be able to crack $5 per share again.

What’s the call? Nokia stock may be a worthwhile buy today, even if upcoming results fail to deliver.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

The post Consider Nokia Stock a Cautious Buy Ahead of Earnings appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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