A month ago before the coronavirus from China escalated into the pandemic we’re witnessing now, Cisco Systems (NASDAQ:CSCO) scuttered a Trump administration-backed proposal to get involved with a couple 5G companies. Essentially, Cisco CEO Chuck Robbins saw little reason to buy a controlling stake in Nokia (NYSE:NOK) and Ericsson (NASDAQ:ERIC). Coincidentally, that period aligned with the peaking and subsequent deterioration of NOK stock.
As you know, prior to the current pandemic dominating headlines, the U.S. and China were locked in a bitter trade dispute that lasted for the better part of 18 months.
In the closing months of 2019, the two sides agreed to a phase one trade deal, bolstering global equities. However, many thorny issues remained.
From the Trump administration’s perspective, it was vital that the White House attain some key concession; otherwise, the President disrupted both economies for nothing.
To gain leverage, Trump sought ways to weaken China’s technological expansion. One viable pathway seemed to be presenting a viable competitor to Huawei. Politically, Cisco taking a controlling stake in NOK stock and its regional rival would accomplish just that.
However, Robbins and Cisco weren’t interested in playing ball. In an interview with Financial Times, Robbins stated, “If you look at the economics of that particular business, it’s not how we run our business.”
The Cisco’s chief executive was referring to the “lower-margin nature of the 5G infrastructure market.” This is of course where NOK stock will see its fortunes either rise or fall.
And Robbins wasn’t kidding. If you look at Cisco’s margins across the board, they’re notably higher than Nokia’s. That’s not a problem per se. Robbins noted that Nokia is well-suited for the infrastructure business. Or it was, until now.
Panic Is Sadly Very Real for NOK Stock
I’m not a doctor and I don’t play one on TV. But irrespective of personal opinions on the current pandemic, one dynamic is evident to everyone: the panic is real. And it really is causing tremendous damage to the markets.
According to CNBC, the Dow Jones plummeted 10% on Thursday, the worst single-day loss in the index since the “Black Monday” crash of 1987. This occurred despite the fact that the Federal Reserve announced a bold new initiative: pumping up to $1.5 trillion into the financial system to calm nerves and restore some sense of order.
Specifically looking at NOK stock, shares lost a staggering 16.6%. I’m not sure how the underlying company is going to stage a comeback.
Obviously, Nokia and Ericcson depend on their robust business networks with China. From the infrastructure angle, you really have no better market. Although China is the market leader for almost everything, it still has particularly vast opportunities in the broader wireless space. In June 2018, a survey indicated that 68% of Chinese consumers owned smartphones. Logically, that leaves a huge gap to be served, supporting the long-term thesis for NOK stock.
Unfortunately, the coronavirus is a massive disrupter. In early February, analysts warned that the coronavirus could delay China’s 5G rollout. Admittedly, the rate of infection has slowed in China, but the global economic pain has just begun. Either way, it’s a negative for NOK stock.
Nokia Is Facing the Music Like Everyone Else
Please keep in mind that I’m not hating on Nokia just to be negative. However, we must be realistic. As things stand, the coronavirus is a black swan event.
And in such circumstances, risk-on names like NOK stock do not receive favorable treatment from investors. As Robbins stated, Nokia’s business is a lower-margin one. That’s fine when the economy is booming and people are eager to consume new technologies. Right now, folks are wondering if they’ll have a paycheck in two weeks.
This latter statement is no hyperbole. As you know, large events — including mass revenue generating professional sports leagues — are either postponed or suspended indefinitely. Airlines and other travel companies are also feeling the pressure. The organizations that do survive are those that are currently stable and cash-rich.
I’m not suggesting that NOK stock is going to zero. But presently, the risk-reward balance doesn’t bode well. I’d wait on the sidelines until the current crisis stabilizes.
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. As of this writing, he did not hold a position in any of the aforementioned securities.
