Why Nokia Oyj (NYSE:NOK) is Back on Investor Screens

Nokia Oyj (NYSE:NOK) has drawn fresh attention after a recent shift in its share performance, with the stock up over the past month and past 3 months, prompting investors to reassess its current valuation.

That recent pullback, with the 1-day share price return down 5.07% and the 7-day share price return down 17.80%, comes after a strong run. This includes a 90-day share price return of 75.32% and a 1-year total shareholder return of 163.46%. This suggests momentum has been strong over the longer stretch despite short term volatility.

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With Nokia now carrying a value score of 1 and trading at US$13.85 against an analyst price target of US$11.54, you have to ask: is this still a potential opportunity, or is future growth already priced in?

Preferred P/E of 86.7x: Is it justified?

On traditional valuation, Nokia looks expensive, with a P/E of 86.7x at a last close of $13.85, even before factoring in the recent pullback.

The P/E multiple compares the share price to earnings per share. At 86.7x the market is paying a high price for each dollar of current profit. For a large, established communications equipment provider, that kind of multiple usually implies investors are putting a lot of weight on future earnings growth rather than what the company is earning today.

Here the picture is mixed. On one side, earnings are forecast to grow around 25.2% per year and are expected to grow faster than the broader US market, while the company has moved into profitability over the past 5 years. On the other side, profit margins sit at 3.9% compared to 6.3% last year, Return on Equity is 3.7% and is forecast to remain below 20%, and the SWS DCF model suggests Nokia at $13.85 is trading above an estimated future cash flow value of $12.69. That combination suggests investors are paying a premium multiple that already incorporates a healthy earnings recovery.

Relative to the wider US Communications industry average P/E of 32.8x, Nokia’s 86.7x multiple is substantially higher. It is also above the estimated fair P/E of 50.8x that the regression based “fair ratio” points to as a level the market could move towards. While the company screens as good value versus a narrow peer group average of 89.2x, the broader and fair value comparisons indicate the current P/E is rich when set against sector and fair ratio benchmarks.

Result: Price-to-Earnings of 86.7x (OVERVALUED)

However, earnings forecasts or margin expectations could be reset if profitability stalls or if the current premium P/E multiple contracts closer to sector benchmarks.

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Another View: Cash Flows Point to a Different Story

The high P/E tells one story, but the SWS DCF model tells another. On that measure, Nokia at $13.85 is trading above an estimated future cash flow value of $12.69. This frames the stock as overvalued rather than cheap on cash flow grounds.

For you as an investor, that gap suggests there may be less room for error if earnings forecasts or sentiment slip. The question is whether the growth outlook justifies paying more than what the SWS DCF model implies, or whether patience is the better stance in this situation.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Nokia Oyj for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 46 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

If the mixed signals on valuation and sentiment leave you unsure, move quickly to review the data for yourself and weigh both sides through 1 key reward and 2 important warning signs.

Looking for more investment ideas?

If Nokia has you thinking harder about your portfolio, do not stop here. Broaden your opportunity set and let data driven stock ideas do some of the heavy lifting.

• Target potential bargains by scanning for companies that combine quality fundamentals with appealing prices using the 46 high quality undervalued stocks.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.