Investors should never judge stocks based on just their price, since prices are meaningless unless they’re paired with growth estimates and valuations. That being said, stocks generally don’t drop under $10 unless there are fundamental problems and there are plenty of lemons in the market’s bargain bin. But investors who are willing to shoulder some risk might find a few hidden gems with strong growth potential. Here are two promising stocks that fit that description: Nokia (NYSE: NOK) and Glu Mobile (NASDAQ: GLUU).
Nokia
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Nokia is the third-largest network infrastructure equipment maker in the world after Huawei and Ericsson. The company no longer produces smartphones — Nokia-branded devices are produced by HMD Global, a separate company that pays Nokia licensing fees.
Over the past few years, Nokia’s stock has been weighed down by tougher competition from Huawei (particularly in China); slower spending from telcos, which prioritized digital ecosystem upgrades over the expansion of their networks; and concerns about the size and effectiveness of its $17 billion merger with Alcatel-Lucent in 2016.
Those pressures caused Nokia’s non-IFRS sales to fall 3%, or 1% on a constant-currency basis, last year. But on the same basis, its net earnings rose 50%, supported by the growth of its higher-margin Nokia Technologies (patent licensing) unit and the integration of Alcatel-Lucent’s operations.
Nokia this week reported that its non-IFRS sales fell 7% annually (but stayed flat on a constant-currency basis) during the first half of the year. Declines at its Nokia Networks unit, which faced softer carrier spending and tougher competition, were partly offset by double-digit sales growth at Nokia Technologies. Its non-IFRS EPS tumbled 64% due to tough year-over-year comparisons, higher operating expenses, and stronger competition.
For the current year, analysts expect Nokia’s revenue to rise 1%, but for its earnings to slide 24% on the aforementioned headwinds. However, Nokia recently signed major 5G deals with China Mobile (NYSE: CHL), the country’s top wireless carrier, and diversified tech giant Tencent (NASDAQOTH: TCEHY). Those partnerships, along with the global rollout of new 5G networks (particularly in North America and China), are expected to boost Nokia’s revenue and earnings by 3% and 36%, respectively, next year.
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Those are decent growth rates for a stock that trades at just 15 times forward earnings. Nokia also pays a hefty forward dividend yield of 4.1%. Nokia’s stock won’t soar anytime soon, but the stock’s low valuation and high yield should limit its downside potential.
Glu Mobile
Mobile game publisher Glu Mobile rose to fame on the success of Kim Kardashian: Hollywood in 2014. But that hit game was a double-edged sword. Glu became too dependent on the title and tried to replicate its success with a streak of less impressive “celebrity” titles.
Decelerating sales growth, concerns about celebrity royalties, and a lack of profits then caused many investors to abandon the stock. Yet Glu gradually turned its business around by pivoting away from celebrity titles and diversifying its gaming portfolio with new franchises like Deer Hunter, Design Home, Covet Fashion, and Tap Baseball.
Last quarter, Glu reported that 69% of its total bookings came from original intellectual property with no royalties due. Its total bookings also rose 25% annually during the quarter, which boosted its total revenues by 43%, marking its fifth straight quarter of year-over-year sales growth. Kim Kardashian: Hollywood remains a core “evergreen” title for Glu, but the company’s expansion and growth prove that it’s not just a one-hit wonder.
Glu’s waning dependence on royalty-supported franchises is helping it narrow its losses. Glu’s net loss of $7.2 million last quarter represented a significant improvement over its loss of $22.8 million in the prior-year quarter. Wall Street expects Glu’s revenues to rise 15% this year as it posts its first full-year profit. If Glu succeeds, its stock would trade at just 19 times forward earnings — which seems like a reasonable valuation for a promising game publisher.
That’s probably why Tencent, the biggest gaming company in the world, has acquired over a fifth of Glu in recent years. If Glu’s prospects continue to brighten, I wouldn’t be surprised if Tencent — or another gaming giant — makes a bid for the company in the near future.
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Leo Sun owns shares of China Mobile and Tencent Holdings. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool has a disclosure policy.
