Why Pressure on Huawei Isn’t Going to Save Nokia Stock

At this point, Nokia (NYSE:NOK) is a 5G (fifth-generation) wireless play. And one of the potential drivers of Nokia’s growth in 5G is political pressure on key rival Huawei. The combination of a growing market and a weakened competitor has been a key pillar of the bull case for Nokia stock.

Why Pressure on Huawei Won't Save Nokia Stock

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The problem is that the competitive environment hasn’t been quite as favorable as bulls hoped, at least so far. The company itself lowered 2020 earnings per share guidance after its third quarter report in October. 5G in fact was a key culprit in that cut.

Nokia forecast higher-than-expected spending this year in a bid to better compete in 5G. As a result, operating margins are expected to be 3 to 4 full points lower than previously thought.

NOK declined 24% on the lowered outlook, its biggest one-day decline in 19 years. Shares have rallied in recent weeks, and the gains do make some sense. But the broader issues remain.

This is a company with a long history of overpromising and underdelivering. It hasn’t proven it can win enough in 5G to support even the currently modest valuation. Meanwhile, it’s becoming increasingly clear that hopes for a two-company race in networking equipment may have been too optimistic.

Huawei Persists

On May 15, 2019, President Trump signed an executive order that effectively banned Huawei from the U.S. market. Huawei also faces limitations on using components from American suppliers; memory chipmaker Micron Technology (NASDAQ:MU), for instance, forecast a big hit to revenue following the order. Apps from Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) now are unavailable on Huawei smartphones.

The pressure goes beyond the U.S. market. The Trump Administration has leaned on allies such as Britain and Germany to remove Huawei from their telecommunications infrastructure. That pressure would seemingly leave Western 5G deployments as a two-company race between Nokia and Swedish rival Ericsson (NASDAQ:ERIC).

But as Bloomberg detailed earlier this month, it hasn’t quite worked out that way. The furor over Huawei actually has led to increased name recognition, and the company’s sales rose 18% in 2019. Some — and possibly most — of that growth is being driven by the smartphone business, but Huawei’s networking business “isn’t just surviving; it’s actually thriving in some areas,” particularly in Asia.

In Germany, lawmakers are pushing for Huawei’s removal from the country’s telecommunications network — but the government led by Prime Minister Angela Merkel is pushing for its inclusion. Telefonica Deutschland (OTCMKTS:TELDF) chose both Huawei and Nokia for its 5G deployment despite that controversy, another data point showing the Chinese supplier’s ability to remain competitive in Europe.

The ‘Simple’ Case for Nokia Stock

To be sure, Huawei is going to be hamstrung in key markets for 5G equipment. U.S. pressure will have an impact — and that’s going to benefit Nokia as it looks to ramp up 5G equipment sales.

But that pillar alone doesn’t look like enough of a driver for Nokia stock at this point. Nokia still lags behind Ericsson and Huawei in announced 5G wins. 2020 guidance has been cut, and investors should take even that reduced outlook with a grain of salt given the company’s history.

Meanwhile, 5G does help growth — but Nokia loses some sales of 4G equipment in the process. There’s a net positive, yes, but it’s not as if Nokia’s revenue growth suddenly is going to accelerate into the double-digits. That’s particularly true if Huawei maintains some level of market share in networking equipment, as appears to be the case.

And so the “simple” bull case here isn’t simple, but overly simplistic. Yes, 5G helps, yes, the Huawei ban, in whatever form it eventually takes, is a positive. But execution has been poor. Nokia might gain some share from Huawei, but it’s clearly losing share to Ericsson at the same time. The dividend is gone, and this company has disappointed investors for years despite being on the right side one of the worst deals in recent history: Microsoft’s (NASDAQ:MSFT) $7.6 billion acquisition of Nokia’s smartphone business in 2013.

Put another way, there are plenty of reasons why Nokia stock hit a six-year low in November, and there are plenty of reason why the recent bounce should be discounted. It’s possible Nokia can claw its way back to growth and positive returns, but it’s going to take a lot more than a bit of help from the U.S. government.

As of this writing, Vince Martin has no positions in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2020/01/pressure-on-huawei-wont-save-nokia-stock/.

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