Nokia Stock Is Still a Gamble, but a More Reasonable One

At a time when many publicly traded companies have suffered under the fear of the coronavirus from China, Nokia (NYSE:NOK) has surprisingly gone against the grain. Far removed from its cellphone glory days, NOK stock now depends on the massive 5G rollout. However, the underlying telecom equipment maker is contesting extremely competitive waters.

NOK Stock Is Still a Gamble, but a More Reasonable One
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That said, speculators are almost sure to consider NOK stock now that a federal judge approved T-Mobile’s (NASDAQ:TMUS) buyout of embattled mobile carrier Sprint (NYSE:S). U.S. District Judge Victor Marrero concluded that the deal wasn’t anticompetitive, disappointing the 13 states and the District of Columbia which argued otherwise. According to the Wall Street Journal’s Drew FitzGerald and Sarah Krouse:

“The judge said the cellphone business was more dynamic than other markets, adding that current features and standards ‘may be considered outmoded and unmarketable in the not-too-distant future, much like brick phones of not too long ago, and the flip phones that replaced them.’”

Naturally, the news spiked shares of the two merging companies, particularly Sprint’s. However, the deal has positive implications for NOK stock as well.

In July 2018, when the T-Mobile-Sprint merger was in pending status, T-Mobile formed a $3.5 billion partnership with Nokia. The purpose was to accelerate the deployment of the 5G network, presenting viable competition to AT&T (NYSE:T) and Verizon (NYSE:VZ).

With the merger, T-Mobile will have access to what the Wall Street Journal refers to as Sprint’s “massive stockpile of wireless radio licenses.” But before the recent announcement, the proposed deal had a history of back-and-forth volatility. Given the uncertainty, the matter negatively affected NOK stock.

However, now that the courts have greenlighted the merger, is everything a go with Nokia?

A Challenging Road for NOK Stock Has Gotten Easier

On one hand, you can’t help but feel some optimism for the telecom equipment provider. After a very rough outing in 2019, Nokia shares are technically looking viable. They popped up 3.5% on the day of the merger announcement. Since the beginning of December, NOK has gained over 27%.

Additionally, Nokia has fundamental momentum. For its fourth quarter of 2019 report, the company delivered earnings of 16 cents per share. That was up 15.3% from the year-ago quarter, while also beating Wall Street’s consensus estimate. Plus, NOK reported a quarterly profit of $1.24 billion, beating consensus expectations by nearly 4%.

What was especially surprising for the Street was that management had downgraded their own outlook for Q4. Due to increased competition from Asian rivals, the company was forced to suspend dividends to invest more deeply in 5G.

But even in the upbeat Q4 report, Nokia still forecasted competition as a tough challenge for 2020. Now, it’s true that one of the uncertainties mentioned during Q4 — the T-Mobile-Sprint merger drama — has just faded. Unfortunately, that doesn’t give a clear pathway for NOK stock; just a less messy one.

For one thing, investors learned that positive implications don’t always pan out. During the heated portion of the U.S.-China trade war, many analysts speculated that Huawei’s fall from grace would benefit Nokia and regional rival Ericsson (NASDAQ:ERIC). But, as Ericsson CEO Börje Ekholm stated, “I think this whole notion that this was a win for Ericsson and Nokia so far has not materialized.”

That’s because Huawei’s security concerns caused 5G demand in multiple countries to slow down. And currently, 5G network equipment demand in North America is slowing down. So, while the merger approval is great, it might also be a moot point.

Nokia’s Still Speculative, but More Reasonable

Using football terms, the situation with NOK stock prior to the merger announcement was fourth-and-ten. It’s not an impossible task if you had to convert, but the odds aren’t great. Now, I’d estimate it as fourth-and-five: much better odds, but still a gamble.

Additionally, investor sentiment over the T-Mobile-Sprint deal should help move the needle for NOK stock. But longer term, many tough headwinds remain. Some of them include:

  • Fierce competition that will only grow exponentially
  • Slowing demand in China, North America and India
  • A less-than-desirable financial situation
  • Coronavirus uncertainties

Moreover, Nokia earlier announced that they will shift to system on chip integrated circuits after they deemed their original field-programmable gate array design too expensive. It’s a costly blunder for a company that can’t afford such mistakes.

The bottom line? The recent news makes NOK stock more interesting, but don’t confuse interesting with automatically viable. This is still a speculator’s game.

As of this writing, Josh Enomoto is long AT&T stock.

Article printed from InvestorPlace Media,

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