A Bullish Case For Nokia

| About: Nokia Corporation (NOK)

Nokia's (NYSE:NOK) valuation among Wall Street analysts is mixed. According to Briefing.com, nine of the analysts covering the stock have a hold rating on the stock. Three have a buy rating, while only two have a sell rating. Six said Nokia will underperform, and three rate Nokia a buy. Nokia's one-year median price target is $3.75, 6% below the current price of $3.97. However, analysts expect that Nokia will earn $0.04 by December this year and $0.12 in the 2014 fiscal year. Even the most bullish analyst thinks Nokia will earn $0.21 by the end of the 2013 fiscal year.

So, according to Wall Street bearish analysts, Nokia's forward price earnings ratio is at least 36. Nokia currently has $3.41 per share in cash and investments on the balance sheet. It trades at a forward P/E ratio of 33. That is an expensive valuation for a company that is expected to grow by 7.50% in the next five years. In other words, Wall Street analysts expect Nokia to grow its earnings per share by 37.5% in five years.

Don't be fooled by these bearish estimates. Just three months ago, the same analysts expected earnings of $0.01 per share for the current quarter, compared to $0.00 for the current estimates. Their EPS estimates for 2014 was also 0.14 just three months ago. While they have revised their estimates for the present quarter, they have not done the same thing for their 5-year estimates. I am, however, extremely skeptical about all of these estimates. Here is why.

1. None of these analysts consider a shift in consumer preferences toward Nokia's products. Eight years ago, BlackBerry was introducing the cutest smartphones. Apple (NASDAQ:AAPL) is the BlackBerry of the present era. It is inevitable that customers will notice that Nokia's products have become cool once again.

2. Nokia will probably show more improvements this quarter. The company says it has been improving its underlying profitability over the past few quarters. The progress of the Lumia line of phones and the signs of recovery of the mobile feature phones are the reasons behind this. Nokia has also been introducing new features in its products to drive revenues. It hopes that the increase in sales will make up for the decline in its margins.

3. Nokia, in the recent past, used to be two steps behind its competitors. But things are changing. Sales of the Lumia line of phones are improving, and the fortune of its feature phones is showing a modest transformation. Nokia's tenacious drive for innovation is the key factor behind the company's resurgence. We will probably find out in the months ahead that Nokia has introduced a game changing smartphone.

I am certain that Nokia will be able to grow its earnings at more than 7.50% over the next five years. Wall Street analysts are being too bearish.


Google (NASDAQ:GOOG), Apple, and Microsoft (NASDAQ:MSFT) are the peers I will use in my analysis. Google is a great stock that is expected to grow its earnings by 15% over the next five years, and its forward P/E ratio is 25. As you have probably guessed, this growth estimate is bullish due to the future prospects of Google's numerous products. Microsoft is in a similar situation. Wall Street expects the company to grow its earnings by about 9% over the next five years. Its forward P/E is just 10. Again, these long-term estimates appear bullish. Apple is a classic tech growth stock that is expected to increase its earnings by 18% over the next five years and has a 2014 P/E of 10.


It is clear that the market value of Nokia's competitors is at the 10 to 25 range. Nokia's market valuation implies that it will earn $0.03 per share annually. The market tells us that Nokia is in a peculiar situation and will continue to experience low earnings in the next five years. I don't think this is likely given the strong growth of the Lumia line of smartphones. I am very certain that Nokia will grow its earnings more than 7.50% annually. I am willing to wait until Wall Street accepts this reality.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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