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Nokia Corp ADR(NOK-N)
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Why Nokia Stock Dropped on Thursday

Motley Fool - Thu Oct 19, 2023

Shares of Nokia(NYSE: NOK) were down 7% as of 10:39 a.m. ET on Thursday after the company reported disappointing operating results for the third quarter. The company said it is moving quickly to lower costs after sales fell 15% over the year-ago quarter on a constant currency basis.

Macroeconomic pressures impacted sales mostly in Nokia's network infrastructure and mobile networks businesses. Cloud and network services posted a 2% year-over-year increase in net sales, but the segment still performed below management's expectations.

Nokia will cut costs to firm up margins

Nokia is targeting a long-term operating margin of at least 14% by 2026. Improving profitability is the first order of business for management right now. On that note, operating margin in the cloud and network services business was the bright spot, up 2.9 percentage points in the quarter.

Overall, the stock's slide reflects a lack of top-line growth as Nokia's free cash flow has been wiped out after reaching nearly $3 billion a few years ago. Cost savings should kick in soon, which will partly be driven by a 10% to 15% reduction in personnel expenses, but the stock may underperform until the company proves it can sustain sales growth.

NOK Free Cash Flow Chart

Data by YCharts

Is Nokia stock a buy?

The stock looks cheap at a forward price-to-earnings ratio of 7.5, but unless Nokia can improve top-line growth and free cash flow, the shares appear to be a value trap. An improving macroeconomic environment would be a catalyst, but even that scenario is unclear as interest rates continue to rise and organizations tighten spending.

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John Ballard 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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