The necessary technologies to usher in the 5G era — particularly in the United States — are only just now becoming available, potentially making Nokia (NYSE:NOK) a solid defensive play at this point.
5G is Coming, Ready or Not
2019 isn’t going to be the “year of 5G.” Although 5G service is available in some select locations, it’s not yet offered in most places. Smartphones must also be built with 5G-compatible components, and most of the smartphones in use today don’t meet that criteria.
However, that picture could be, and likely will be, different a year from now.
AT&T (NYSE:T) says it will offer nationwide 5G by the end of 2020. Ditto for T-Mobile (NASDAQ:TMUS). Just as importantly, many more 5G-compatible major-brand phones will be readily available in 2020. The first 5G-capable iPhone from Apple (NASDAQ:AAPL) is supposed to debut next year, which has already inspired something of a race.
Consumers will do their part, too. Once some of them experience wireless connection at least speeds ten times faster than the current 4G norm, they’ll clamor for game-changing 5G devices.
Deal Growth Bodes Well for Nokia Stock
The infrastructure needed to make 5G a reality is being put in place now.
In June,NOK announced it had inked 42 different 5G-related hardware deals (that number has since been upped to 45) across the globe. According to NOK, that’s more than any other supplier has confirmed. Based on those numbers, it appears that Nokia’s rival, Ericsson (NASDAQ:ERIC). is winning about one-third fewer 5G deals than NOK.
Both statements are contentious, and questionable. Huawei says two-thirds of 5G installations outside of China utilize the hardware and corresponding software it offers, while Ericsson paints an obscure picture that at least implies it’s holding its own against NOK.
One thing is clear, though; Nokia is winning some business, but most of the deals have yet to generate reportable revenue that can meaningfully boost Nokia stock. Those deals won’t generate reportable revenue until the installations they’re facilitating are completed and up and running.
How much revenue NOK has already lined up from its deals isn’t clear, and some of the projects can still be canceled.
By and large though, NOK has already lined up a great deal of new, incremental revenue that will start flowing in the second half of 2019 and then grow through 2020. Barring an outright, global economic meltdown, most of those 5G contracts should be completed by the end of next year. New ones will be added in the meantime.
Looking Ahead for NOK Stock
Consumers have to have food and their mobile internet service, their usual guilty pleasures. As a result, those are two of the few slivers of the market that are shielded from macro pain.
Nokia’s top line is expected to drop 1.5% this year, but next year’s anticipated 3% improvement is more significant than it may seem to be on the surface. That’s because the rebound sets the stage for considerable earnings growth.
While this year’s average outlook by analysts for a profit of 27 cents per share of NOK stock only matches last year’s EPS, the pros, on average, are calling for its EPS to jump to 41 cents in 2020. Most of that top and bottom line growth is the result of anticipated new 5G-related revenue.
Assuming Nokia’s 2020 EPS comes in at 41 cents, by the way, Nokia stock now has a forward-looking price-earnings ratio of only 12.5.
The trick going forward is getting the masses to believe in the company’s outlook enough to shake Nokia stock out of its slump. NOK still has enough firepower to inspire such buying if the company manages to garner enough attention from the Street.
As of the time of this writing, James Brumley did not hold a position in any of the aforementioned securities. To learn more about James, visit his site at jamesbrumley.com, or follow him on twitter at @jbrumley.