Is Nokia a Risky Investment?

With shares of Nokia (NYSE:NOK) trading around $3.25, is NOK an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Nokia operates as a mobile communications company worldwide. It operates in three segments: Devices & Services, HERE, and Nokia Siemens Networks. The Devices & Services segment offers feature mobile phones and smartphones such as the Lumia consisting of Microsoft’s (NASDAQ:MSFT) Windows phone operating system; and spare parts. The HERE segment develops a range of location-based products and services for consumers, platform services, and local commerce services for its feature phones and smartphones, as well as for other device manufacturers, automobile manufacturers, application developers, Internet service providers, merchants, and advertisers. The Nokia Siemens Networks segment provides telecommunications infrastructure to the mobile broadband market. The mobile communications industry is growing at an explosive pace, if Nokia positions themselves well, they stand to see a significant rise in profits. Through its segments, Nokia is seems to be diverse and innovative enough to provide communications technology to growing businesses and economies worldwide.

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T = Technicals on the Stock Chart are Weak

Nokia stock has seen a consistent decline in its stock since late 2007. The stock has recently bounced off of lows but the overall long-term price trend seems to be pointing lower. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Nokia is trading around its key averages which signal neutral price action in the near-term.

NOK

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Nokia options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Nokia Options

52%

3%

1%

What does this mean? This means that investors or traders are buying a very minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very minimal amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Nokia’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Nokia look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

13.64%

-87.10%

-778.57%

-537.50%

Revenue Growth (Y-O-Y)

-23.40%

-20.68%

-23.13%

-29.56%

Earnings Reaction

-12.93%

-8.92%

-5%

6.49%

Nokia has seen decreasing earnings and revenue figures over the last four quarters. From these figures, the markets have been disappointed with Nokia’s recent earnings announcements.

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P = Poor Relative Performance Versus Peers and Sector

How has Nokia stock done relative to its peers, Ericsson (NASDAQ:ERIC), Research in Motion (NASDAQ:BBRY), Apple (NASDAQ:AAPL), and sector?

Nokia

Ericsson

Research in Motion

Apple

Sector

Year-to-Date Return

-15.82%

19.70%

25.02%

-22.90%

6.53%

Nokia has been a relative underperformer, year-to-date.

Conclusion

Nokia provides mobile communication products to a large user base around the world. Its products were once considered innovative but have taken the backseat in recent times. The stock has not performed well as earnings and revenue figures are not meeting investor expectations. Relative to its peers and sector, Nokia stock has trailed, in year-to-date performance, by a significant margin. STAY AWAY from Nokia stock for now.

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