Nokia Stock Has Lost Everybody Except the Contrarians

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Prior to its third-quarter earnings report – released this past October – telecom firm Nokia (NYSE:NOK) offered a speculative but tantalizing risk-reward opportunity. As everyone knows, Nokia stock has earned a reputation over the years as a wild investment. But for short-term traders, volatility is exactly what is needed to realize profits.

Nokia Stock Has Lost Everybody Except the Contrarians

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For those who could stomach the risk, Nokia stock had compelling bullish and bearish factors. The bearish factors involved many known weaknesses.

Primarily, shoddy financials kept a lid on the NOK stock price. Furthermore, the competition in the lucrative 5G space featured players that are walking on much more stable ground.

On the other hand, many of the well-heeled competition suffered from the impact of the U.S.-China trade war. This heated international dispute brought into question the ultimate motives of Chinese tech firms like Huawei. As a Finnish – and therefore politically neutral – organization, Nokia was relatively sheltered from the dispute.

More importantly, the 5G rollout is a massive undertaking, offering myriad revenue channels. No one entity could possibly service every cog of this gear. In other words, this town is more than big enough to accommodate several contenders.

But following the disclosure of the Q3 results, the bullish case for Nokia stock took a major hit. Although earnings and revenue metrics were roughly in line with analysts’ expectations, management gave a disappointing guidance for full-year earnings.

Of course, every company disappoints from time to time. What unsettled investors of NOK stock, though, was the reason for the downgrade: rising costs associated with keeping Nokia’s 5G products competitive have negatively impacted the bottom line. Thus, the risk-reward balance definitely shifted to the speculative end of the spectrum.

NOK Stock Losing Selling Points

With the painful disclosure, the case for Nokia stock for conservative investors is clear: stay far away.

Unfortunately, it wasn’t just the earnings downgrade that affected the viability of NOK stock. Because of the damage done to the financials, as well as the resource outlays necessary to stay relevant in 5G, management made the decision to cut its dividend payouts.

At that point, investors had no guarantees to justify their long position. Instead, they must hope purely in the capital gains potential. However, the major problem to this strategy is that it isn’t really a strategy at all.

Throughout the second half of this decade, NOK stock has traded in a frustratingly sideways consolidation pattern. Since the Great Recession, the once unassailable telecom giant has looked a sad shell of its former self. Therefore, the incentive to take a risk has depleted considerably.

Although the two industries are hardly alike, the sentiment between telecom and the rising “agricultural” industry is similar. While favorable legalization initiatives seemingly bolster botanical companies, mere association with legality wasn’t enough. In the same way, stakeholders of Nokia stock want more than just the potential of 5G revenue channels: they want to see a credible narrative.

A related headwind that hurts NOK stock is the field of competition: simply put, investors have many choices to direct their funds. In Nokia’s 5G equipment space, they’re competing against Huawei, Ericsson (NASDAQ:ERIC), Cisco (NASDAQ:CSCO) and Samsung.

Among the publicly traded companies, Ericsson offers similar exposure but with arguably less risk. Cisco is a stable blue chip that does offer a reasonably attractive dividend. And CSCO shares recently went volatile, offering a discounted opportunity to a far superior name.

From all angles, Nokia stock appears increasingly irrelevant.

The Bottom Line on Nokia Stock

Again, I’ll reiterate: the probability that NOK stock will move higher from here has taken a major hit. Therefore, this is not a name for those who are risk averse.

Even for those who identify as contrarians, NOK carries substantial baggage. However, I can understand why a select minority may view this as an opportunity.

First, on the technical front, I’m not sure how much bad news can further drag Nokia stock. Prior to Q3, everyone knew about the underlying company’s strained financials. The earnings report crystallized how bad the fiscal situation is but didn’t necessarily offer anything groundbreaking.

On that note, it’s possible for NOK stock to jump for any reason, just like it has in the past.

Second, Nokia offers an interesting take in the 5G space with its end-to-end services. Unlike its competitors, Nokia doesn’t contract out to third-party vendors for servicing the various cogs of the 5G machinery: it’s all done under the Nokia umbrella, which saves clients money.

Of course, such an undertaking is expensive; hence, the Q3 disappointment. But there is something substantive here. It’s just that the negatives now outweigh the positives, making NOK a risky trade at best.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


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