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Why Nokia Stock Crashed Today

Motley Fool - Thu Apr 20, 2023

What happened

Nokia (NYSE: NOK) shares are tanking in late-morning trading Thursday -- off 9.4% as of 11:55 a.m. ET -- after the Finnish telecommunications technology company reported an earnings miss for its first quarter 2023.

Heading into the quarter, analysts had forecast that Nokia would earn approximately $0.08 per share on $6.2 billion. Nokia's actual earnings, however, when converted into USD, worked out to just $0.05 per share -- this despite the fact that revenue of $6.4 billion exceeded expectations.

So what

So Nokia's news wasn't all bad. Indeed, in at least a couple respects it was quite good. Sales grew a respectable 10% year over year for the quarter. And despite gross profit margin contracting by 310 basis points (to 37.5%), Nokia still ended up growing its profits 25% year over year.

It didn't hurt that, by keeping costs in check, Nokia managed to expand its operating profit margin by 70 basis points (to 7.3%) despite the gross margin decline.

Free cash flow for the quarter, on the other hand, was negative -- about negative $110 million.

Now what

CEO Pekka Lundmark described the results as "a solid start to 2023," and reaffirmed Nokia's targets through the end of this year. Nokia is still targeting sales of between $22.4 billion and $23.8 billion. Even better, management continues to believe it can grow operating profit margins significantly from Q1 levels -- to a range of 11.5% to 14%. At the high end of that range, profits per revenue dollar could nearly double for Nokia, yielding as much as $3.3 billion in operating profit.

Subtract 25% for income taxes, and that all works out to $2.5 billion in net income this year, resulting in a valuation of about 9.5 times current-year earnings for Nokia.

All this being said, it's important to remember that this valuation only works if Nokia maxes out both its revenue forecast and its hoped-for profit margin. A failure to accomplish either (or both) of those goals would result in a more expensive stock. When you consider further that most analysts following Nokia today don't see the company growing earnings much faster than 4% annually over the next five years, I'm forced to conclude: Nokia stock is still too expensive to buy.

And the investors selling off Nokia today are making the right call.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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