Nokia’s Price Falls -3.0%. Is It Fairly Valued?

Broadcasting company Nokia stunned Wall Street today as it plummeted to $4.71, marking a -3.0% change. NOK is -29.88% below its average analyst target price of $6.71, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, shares of Nokia have offered a similar return to the S&P 500, moving -6.7%.

Nokia's trailing 12 month P/E ratio is 5.8, based on its trailing EPS of $0.81. The company has a forward P/E ratio of 9.6 according to its forward EPS of $0.49 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio of US technology companies is 27.16, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.

Nokia's PEG ratio of 1.6 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.

To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on NOK's margins:

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2022-12-31 24,911,000 14,689,000 41.03 3.12
2021-12-31 22,202,000 13,368,000 39.79 5.94
2020-12-31 21,867,000 13,653,000 37.56 5.18
2019-12-31 23,315,000 14,989,000 35.71 n/a
  • Average gross margin: 38.5%
  • Average gross margin growth rate: 3.5%
  • Coefficient of variability (higher numbers indicating more instability): 6.1%

We can see from the above that Nokia business is not strong and its stock is likely not suitable for conservative investors.

Nokia's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) FreeCashFlow ($ k) YoY Growth (%)
2022-12-31 1,474,000 -601,000 873,000 -57.74
2021-12-31 2,626,000 -560,000 2,066,000 61.41
2020-12-31 1,759,000 -479,000 1,280,000 526.67
2019-12-31 390,000 -690,000 -300,000 n/a
  • Average free cash flow: $979,750,000.00
  • Average free cash flow growth rate: 40.6%
  • Coefficient of variability (lower numbers indicating more stability): 100.7%

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in NOK have received an annualized dividend yield of 2.5% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the first quarter of 2023, the average P/B ratio for technology companies is 6.23. In contrast, the average P/B ratio of the S&P 500 is 2.95. Nokia's P/B ratio is 1.2, telling us that the market value of the company exceeds its book value by a factor of 1, but is still below the average P/B ratio of the Technology sector.

Since it has a very low P/E ratio, a lower P/B ratio than its sector average, an irregular stream of positive cash flows with an upwards trend, Nokia is likely undervalued at today's prices. The company has mixed growth prospects because of an inflated PEG ratio and weak and inconstent operating margins with a positive growth rate. We hope you enjoyed this basic overview of NOK's fundamentals. Make sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.