With Nokia (NYSE:NOK) poised to benefit from the problems of a key competitor and the hiring of a new, highly capable CEO, now is a good time to buy Nokia stock.
Nokia is supplying much of the infrastructure that enables 5G networks. Yet the stock has not risen much in recent years. But a recent development may change that situation, as President Donald Trump took a step that will badly hurt Huawei’s efforts to win 5G infrastructure deals around the world.
Specifically, according to The Asia Times, the president last month issued an order banning “sales of computer chips made anywhere in the world with U.S. equipment” to Huawei, a Chinese company that America has accused of spying for Beijing.
The Asia Times stated that “in the medium term, China will build substitutes for U.S. equipment.” But in the short-term, Nokia can rack up many lucrative 5G deals. Moreover, 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.
As of the end of February, Huawei had won 91 5G deals, versus Nokia’s 67 contracts and Ericsson’s (NASDAQ:ERIC) 81 agreements.
In the aftermath of Trump’s order, Nokia is well-positioned to win deals from many carriers that will have to cancel their contracts with Huawei. Moreover, Nokia’s share of 5G contracts that have not yet been awarded should approach 40%, versus the 28% that it had won in February.
That will translate into huge improvements in the company’s financial results in the next couple of quarters. And if Trump is reelected in November, the ban on Huawei’s use of American equipment will likely continue for years, enabling Nokia’s share of 5G deals to remain elevated for the foreseeable future.
New CEO and Nokia Stock
Under Nokia’s current CEO, Rajeev Suri, who took the company’s helm in 2010, NOK stock has been on a fairly consistent downward trajectory. On August 1, 2010, the company’s closing share price was $8.56. On June 11, 2020, its shares closed at $4.11.
The dominance of Apple’s (NASDAQ:AAPL) iPhone and Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) Android in the cell phone market, which began before Suri became CEO, is a major reason behind the poor performance. But Suri has clearly failed to turn Nokia around.
Moreover, during his tenure, the acquisition of Alcatel-Lucent, executed in 2016 “caused distractions and delays in product development” and burned “billions of dollars” in integration costs alone, according to Barron’s. Further, Nokia has “lost the lead on 5G” because of “distractions,” the publication added.
Given Suri’s track record, Nokia was right to change course at this point. Suri’s replacement, Pekka Lundmark, worked at Nokia during its up-and-coming and “golden years” of 1990-2000.
During that time, he was the SVP, Marketing of Nokia Internet Communications and the VP Strategy and Business Development of its Networks unit. In September 2015, Lundmark became CEO of Fortum (OTC:FOJCY), a position he still holds today.
According to Lundmark’s LinkedIn page, Fortum specializes “in CO2-free and efficient electricity and heat production.” From September 2015, Fortum’s share price surged from $3 to $4.76.
JPMorgan analyst Sandeep Deshpande says that Nokia’s technology is improving, and he predicts that its free cash flow will be nearly $400 million in 2020.
In 2018 and 2019, it reported negative free cash flow of €312 million and €300 million, respectively. In late May, Deshpande upgraded his rating on Nokia to “overweight” from “neutral” and increased his price target on the name to $5.50 from $3.95.
The Bottom Line on NOK Stock
Nokia is well-positioned to take market share from Huawei and benefit from the proliferation of 5G, while its new CEO looks like a good choice. Finally, JPMorgan expects its free cash flow to rebound sharply this year.
As a result of these points, I recommend that investors buy Nokia stock now.
As of this writing, Larry Ramer did not own shares of any of the aforementioned securities. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer.
