The 5G revolution has taken a back-seat to the rest of the chaos driving the stock market over the past few months. But it’s still a theme worth keeping in mind as tech firms plow ahead with new technology aimed at maximizing the new network’s capabilities. Nokia (NYSE:NOK) is one of the premier players in the space. Though the firm suffered a few hiccups early on, Nokia stock is looking more like a buy with each passing week.
Nokia will probably be one of the biggest beneficiaries of the U.S. tension with China, which should provide a notable tailwind over the next few weeks. Plus, now that the company’s acquisition-related headaches are firmly in the rear-view mirror, NOK stock looks ready to lift off.
Nokia Stock Will Win New Business
As 5G networks begin rolling out across the world, a handful of equipment makers will reap the benefits. In addition to Nokia, Ericsson (NASDAQ: ERIC) and Huawei are some of the industry’s other major players. Nokia has been on the bottom of the totem pole, though. As of February, the firm had secured just 67 5G contracts compared to Ericsson’s 81 and Huawei’s 91.
But all of that will probably change as the U.S. and Beijing continue to spar over everything from the cause of the novel coronavirus to trade deal terms. Earlier this year, President Donald Trump and his administration banned the sale of American computer chips to Huawei.
That’s going to be a major setback for the Chinese firm, which relies on those parts to build 5G network equipment. While China has been working to build its own replacement parts, that may not be enough to convince customers to stick with Huawei. As InvestorPlace’s Larry Ramer pointed out, those still looking for equipment providers are unlikely to choose Huawei in the wake of the decision.
Many carriers around the world that are looking to upgrade to 5G networks (and will have to spend hundreds of millions of dollars to do so) will probably not want to rely on unproven technologies to support those networks.
Alcatel-Lucent Disaster Is Behind Nokia
Another reason Nokia stock has some forward momentum is the fact that the firm’s botched Alcatel-Lucent acquisition is finally in the past. The deal was expensive and caused delays for Nokia that ultimately ended with the firm losing a significant amount of market share.
But according to J.P. Morgan’s Sandeep Deshpande, the puzzle is finally coming together for Nokia and that should pay off for investors. The firm is expected to have positive free cash flow this year, something Deshpande believes will significantly up investors’ valuation of the stock.
New Executive Suite
On top of Nokia’s shift toward greater profitability and healthy free cash flow, the company has also been overhauling its executive management team. In September, Pekka Lundmark will take the reins as new CEO. Marco Wiren was named the new CFO earlier this month.
The new team is likely to use the transition as an opportunity to completely revamp Nokia’s financials. CEOs are judged by where they take the company from the moment it’s turned over, so you can bet that Lundmark and Wiren will look for every skeleton in Nokia’s closet and clear them out during their first quarter at the helm.
Plus, Lundmark is getting the company at a key transition point. That means he has a huge opportunity to take Nokia from the bottom of the totem pole to a market leader. Much of that would be attributed to his management, giving him added incentive to make a successful leap in the market.
NOK Stock Offers Opportunity
Of course, Nokia stock comes with a fair amount of risk. There’s no guarantee that potential Huawei customers are going to swap to Nokia. There’s also a chance that Trump loses the White House in November and a Democratic administration takes a softer stance on China.
However, when it comes to 5G stocks, Nokia stock’s lower valuation offers investors a better value play. If Nokia can pull off this transition, the stock will likely make its way closer to the valuation of peers like Ericsson. By contrast, ERIC stock has most of the 5G benefits priced in. Although it’s not necessarily a bad play in the 5G space, it doesn’t offer the same upside that NOK does.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.