Nokia’s Bullish Run Is About to Come to an End

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Nokia (NYSE:NOK) has done an about face since I last wrote about it in March. Nokia stock is up over 75% from the depths of the March sell-off. What’s changed?

Rising Nokia Still Has a Long Way to Go
Source: RistoH / Shutterstock.com

Well, a positive earnings report for one. And as InvestorPlace contributor Josh Enomoto wrote, Nokia may benefit from the ongoing cold war between the U.S. and China involving intellectual property and the novel coronavirus.

With 5G as a catalyst, Nokia stock has recovered its entire year-to-date loss. And with the economy reopening beginning to ramp up, investors are wondering if Nokia still has room to climb.

InvestorPlace’s Thomas Niel suggests caution. And I tend to believe him because, in the words of the company’s Chief Financial Officer Kristian Pullola, it’s “not yet time to declare victory” as the company still faces several unknowns as it relates to the novel coronavirus.

Nokia Lowered its Forward Guidance

First the good news. Despite posting a 2% decline in revenue, Nokia did post earnings that were in line with analysts’ expectations. The earnings boost was broadly based across all segments of Nokia’s business. And, the positive earnings number was encouraging considering that the first quarter is typically one of the company’s weakest quarters.

Also, unlike many companies, the Covid-19 pandemic has actually been a boost to the company’s business. Network capacity has never been more important.

But with all that said, Pullola still felt compelled to issue caution, and much of that has to do with the unknown. The company expects demand to decline in future quarters. This touches on the contradiction of 5G. As large of an opportunity as the technology represents, many companies are going to be in recovery mode.

Nokia’s adjustment was not a large adjustment. The new guidance forecasts adjusted earnings per share between 20 cents and 32 cents. Previous guidance had been for an EPS between 23 cents and 34 cents.

China Tensions Will Persist Throughout 2020

In an understatement of epic proportions, the Chinese government will be closely watching the U.S. election. No administration in my lifetime has taken a harder line on China than the Trump administration. And it’s unlikely that another four years would mean a lessening of tensions between the countries.

Being a Finnish company, Nokia would seem to be in a good position as a neutral party to this conflict. And Nokia has held its own in China with a 90% win rate in 5G contracts that includes China.

However, elections have a funny way of putting issues on the back burner. This election, as is the case in nearly every election, will be about the U.S. economy. When issues of social justice and income equality, particularly along racial lines, push a global pandemic to the side, it’s safe to say that American voters are identifying what their focus will be in this campaign.

And that means China may be less of an issue. We are a nation that has mastered the concept of kicking the can down the road. Any anti-Huawei sentiment would potentially be an additional headwind for Nokia.

The Bottom Line on Nokia Stock

The recent gain in Nokia stock is understandable. In a market where investors are looking for value, Nokia looked, and probably was, oversold. But investors won’t really be able to say the narrative about Nokia has changed until the third quarter at the earliest.

And that makes the company at its current price look overbought. The relative strength indicator for Nokia is more than 78, indicating that the stock is overbought and likely to decline.

Furthermore, Nokia cut its dividend last October. In November, the company said it would be in a position to reinstate the dividend if it had a cash balance of 2 billion euros. However, that is unlikely to happen until the end of 2020 at best. Without a dividend to provide a hedge, there’s no urgency to drive Nokia stock higher.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/nokia-stock-is-not-in-the-clear/.

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