After a few years of relative obscurity, Nokia (NYSE:NOK) stock is trading higher once again. That may come as a surprise to some people unfamiliar with recent developments surrounding the Finnish telecommunications company.
To be fair, investors may be skeptical of putting their hard-earned money in a firm with a checkered past. Nokia was once the best-selling mobile phone brand in the world. In comparison, Apple‘s (NASDAQ:AAPL) iPhone had just 5% of the market in 2007 — the year it was introduced.
We all know what happens next. Nokia loses 90% of its value within six years and becomes a classic case study of not evolving with the times.
However, things are finally looking up as the world marches toward 5G adoption. Nokia’s new CEO, Pekka Lundmark, is planning to scale down operations to a more appropriate and manageable size and make sure it does not become a high-cost 5G developer.
Also, the stock is still cheap, trading at a forward price-to-earnings ratio of 17.06x, a 26.97% discount to the sector median.
With so much going right for it at the moment, it is an excellent time to buy NOK stock if you haven’t already.
5G Adoption Will Drive Shares Higher
The novel coronavirus has undoubtedly put a hold on 5G adoption. But Covid-19 is a long-term tailwind, as internet traffic is surging during the pandemic. Mobile network operators are having a tough time dealing with that traffic increase, as more people shift to a work-from-home environment.
The trend is unlikely to die down even if we have a Covid-19 vaccine by the end of the year. According to a recent study, 67% of companies that have adopted work-from-home policies expect these to become permanent or be in place for the long-term. So, those meetings on Zoom (NASDAQ:ZM) are here to stay.
The spike in bandwidth will ultimately help Nokia, Ericsson (NASDAQ:ERIC) and Huawei — the select few big players in the industry responsible for building the technology’s infrastructure. The 5G technology will power everything from remote work to artificial intelligence. So, it’s not surprising that analysts are bullish on these names at the moment.
New Management Aims to Streamline Operations
Lundmark will take over as Nokia’s new CEO in September. Although the executive remains tight-lipped regarding the strategic decisions he will make in the fall, it’s virtually guaranteed that they will involve job cuts and disposal of non-core assets. Both these decisions will be unpopular, but they’re vital to ensure the company isn’t bloated.
It’s also evident that the company is firmly committed to its 5G plans, even at the expense of other business lines, like optical products. Just recently, Nokia announced it would cut 1,233 jobs at its French subsidiary Alcatel-Lucent International. The unit develops and markets optical products, an area where Nokia has struggled. I’m sure that the company’s management will identify further areas that are producing low margins and eliminate them as well.
Short-term Risks Could Hamper Progress
Although there are several bright spots in Nokia’s story at this point, there are some headwinds that could hamper its progress. Firstly, the company plans to transition to lower-cost 5G chips by 2022. That’s a seriously long time horizon in the tech world, where a year is often equal to an eon.
Meanwhile, there were also whispers that Verizon is unhappy with Nokia. According to Rosenblatt analyst Ryan Koontz said Verizon was close to replacing Nokia with Samsung (OTCMKTS:SSNLF). JP Morgan (NYSE:JPM) promptly downgraded Nokia to “neutral” from “overweight” after this news emerged. In a note, JPM said it there was a real risk Verizon will depend less on Nokia as their primary RAN (radio access network) supplier going forward.”
Since then, Verizon has come forward and reiterated support for the company, but the air of uncertainty surrounding future commitments remains. There is a real risk that Samsung or another competitor could vie for a sizeable chunk of Nokia’s business. Although it’s a niche market, a concern remains that competition could intensify as 5G attracts more players to the sector.
Final Word on Nokia Stock
It seems that for the first time in a while, Nokia is generating positive headlines. I expect that the company will carry this momentum into 2021. According to the latest jobs report, the U.S. economy created 4.8 million jobs in June, smashing estimates. It’s an encouraging sign that things are getting back to normal in the States, and similar reports are emerging from Europe as well.
As the virus loosens its grip, we will see 5G adoption at high speeds across the globe. Nokia will benefit immensely from this, with revenue and profitability growth sure to follow.
Considering all this, I would say Nokia stock is reasonably priced and presents an attractive entry point that may not be available for a lot longer.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. He does not directly own the securities mentioned above.
