5G will become the dominant data transmission standard over the coming decade. Nokia (NYSE:NOK) is poised to continue battling the likes of Huawei and Ericsson (NYSE:ERIC) for market share and profitability, while it looks to emerge as the clear cut winner.
5G is clearly going to be the bread and butter of Nokia and will go a long way in determining its fate over the coming decade. Although the technology is still nascent, Nokia stock will figure into the conversation.
Nokia has prioritized U.S. and European 5G markets, which should go a long way toward making the stock a buy.
Q1 2020 Showed a Small Profit for Nokia Stock
The company was profitable in the first quarter of 2020. This is positive in an environment in which we routinely hear about massive declines and Q1 2020 being the worst quarter ever. But we also have to weigh this against the performance of Nokia’s comparables. Namely, Huawei and Ericcson. Both companies increased revenue in Q1 2020 so there’s no clear winner on that front.
China Won’t Help Nokia
5G spectrum auctions allow companies to bid for the rights to defined bandwidth frequencies over which data is transmitted. Securing those rights establishes strong competitive advantages for winning firms.
Recently China Telecom (NYSE:CHA), China Unicom, and China Mobile (NYSE:CHL) tendered contracts for 5G in China. Nokia failed to win any although it was seen to be a major player. One of few arguments for this being a positive is that Nokia’s IP won’t be stolen by the Chinese Government. I don’t find this to be a strongly compelling narrative against Nokia operating in China. But the fact that Nokia didn’t secure 5G contracts in China does provide fuel that ignites narratives around what the company might do in the U.S.
Swedish rival Ericcson secured about $1 billion worth of contracts in the same auctions with Chinese firms scooping up about $5.2 billion worth.
None of this is to imply that Nokia has thrown in the towel on 5G in China. The official company line is that profitability in China supersedes market share. Surely, the company can sell handsets and network equipment in China in the future with an emphasis on profitability within those sales.
But they have already shown that they won’t compromise with China and customize Nokia 5G R&D to the demands of that market.
Further, their cost structure within 5G is less than ideal. Management has explicitly stated that its ReefShark chipset’s high cost has led to lower profitability vis-a-vis its competitors. So much for the idea of prioritizing profitability over market share. From where I’m sitting, it looks like neither market share in China nor profitability from sales in China are likely to materialize any time soon.
The U.S. Is a Source of Hope
While Nokia is unlikely to move the needle in China, the same pessimism isn’t true in the U.S. Nokia has long been strategizing for 5G dominance in the U.S. The company has secured many contracts stateside. And Nokia is well-aligned with the four major carriers AT&T (NYSE:T), recently merged T-Mobile and Sprint (NASDAQ:TMUS), and Verizon (NYSE:VZ). Nokia’s 5G products and services are referred to as being end-to-end in coverage and span radio, core, cloud, transport, management, automation, and security. They should figure to play a big role in the U.S.
At the beginning of 2020 Nokia announced it had secured upward of 63 5G contracts in the U.S. and globally, so it has a strong foothold outside of China to capitalize from this new generation of data transmission.
Takeover Rumblings and Nokia
Recently there has been speculation that Nokia is a takeover target. Nokia failed to secure any contracts in China. Nokia’s stock has been weak for the past year and had trouble creating shareholder value. These problems are compounded by recently announced layoffs and a change of CEO. But even amidst all of this trouble there is reason to be optimistic. Nokia is going to benefit from its U.S. strategy in the coming years. So as 5G is rolled out, Nokia should be well-positioned to rise.
Who Could Acquire Nokia?
The U.S. is concerned about 5G and national security. U.S. regulators will likely move to block China from gaining any further foothold in U.S. 5G. So it’s unlikely Huawei or Chinese firms will acquire Nokia if anyone does.
The stakes are too high. Regulators will undertake every effort to keep Nokia aligned with U.S. interests.
Speculation stateside has ranged from the U.S. Government buying a controlling share of Nokia to Cisco Systems (NASDAQ:CSCO) absorbing Nokia in a takeover. Either case would bring a portion of the 5G industry under U.S. control which matters in the politicized environment of the trade war.
Perhaps Nokia will continue with its current structure. Time will tell, but I believe Nokia’s stock is a buy.
As of this writing, Alex Sirois did not hold a position in any of the aforementioned securities.
