For the past several years, Nokia (NYSE:NOK) has been a frustrating and somewhat irrelevant organization, at least from an investor’s perspective. And while the relevance of Nokia stock has changed due to the emergence of 5G technologies, the frustration hadn’t. Then, the novel coronavirus happened. Will this devastating, yet transformative event change the narrative for NOK, possibly for good?
Of course, it’s not just the health aspect that will impact Nokia stock. Rather, this unprecedented pandemic has reconfigured the compass economically, societally and geopolitically. What has either alarmed or emboldened investors (depending on your perspective) is skyrocketing tensions between the U.S. and China.
As you’ve undoubtedly heard, the federal government ordered China’s consulate in Houston, Texas to close. In retaliation, the Chinese ordered the U.S. to close its consulate in Chengdu. Naturally, this has huge implications for Nokia stock, with the underlying company doing significant business in China. On top of this, NOK is scheduled to release its earnings results for the second quarter on July 31.
Covering analysts have a consensus earnings-per-share target of 3 cents. The estimate spectrum is nominally tight, ranging only between 2 cents and 4 cents. In the year-ago quarter, Nokia produced EPS of 6 cents, handily beating the consensus estimate of 3 cents.
For the revenue side, analysts are looking for $5.8 billion. Individual estimates range from $5.5 billion to $6.1 billion. In Q2 2019, the company rang up robust sales of $6.4 billion, exceeding the consensus target of $6.1 billion.
With Nokia stock needing justification to bounce out of its recent consolidation pattern – or an excuse to fall out of it – Q2’s results will have a big impact.
On Paper, Nokia Stock Has a “China Catalyst”
Initially, investors may believe that Nokia stock is a no-brainer. Indeed, the concept is logical. After all, it’s not just the U.S. that has problems with China but also American allies, which have likewise accused the Chinese government of various shenanigans. This opens the door for NOK to enhance its business.
Additionally, the stats back this thesis up. While so many people play up the broader China narrative, for Nokia, the country accounted for just under 8% of its global revenue in 2019. Of course, that’s not an allocation to scoff at. However, the North American market accounted for nearly 30%. Also, Europe represented just over 28%.
Obviously, losing opportunity and momentum in China hurts. However, NOK could theoretically make up for the loss by appealing to western companies and governments. Let’s face it – I don’t think we’re too worried about Nokia’s native Finland spying on us.
So, an easy buy for Nokia stock, right?
But Wait, There’s More!
Before you get your hands caught in the cookie jar, you should consider why many investors are hesitant. Although Nokia generates most of its revenues outside China, it has an overall significant business presence there. And by presence, I mean manufacturing plants.
Thus, it’s not a simple matter of NOK’s management team embracing the warmth of U.S. and European arms. Selling to these friendly regions still requires manufacturing in China. As you might guess, that’s not going to sit well with the Chinese Communist Party.
Predictably, the CCP raised a fuss about the matter. According to the Wall Street Journal, “Beijing is considering retaliating against the Chinese operations” of Nokia and rival Ericsson (NASDAQ:ERIC). Further, the WSJ writes:
China’s Ministry of Commerce is mulling export controls that would prevent Nokia and Ericsson from sending products it makes in China to other countries, the people [familiar with the matter] said. One person added that this was a worst-case scenario that Beijing would use only if European countries came down hard on Chinese suppliers and banned them from their 5G networks.
Again, this isn’t as simple a matter as you might think. Therefore, you should think carefully before engaging Nokia stock.
A Hearty Debate
Typically, an investment story popular in the blogosphere will have voices leaning conspicuously to one side or another. But with Nokia stock, the narrative is, in my opinion, as balanced as you can get.
If you like NOK stock, you have several reasons to justify your thesis. Not only may western companies/countries offer greater opportunities for Nokia, western multinationals are actively considering leaving China. They may not be a part of the discussion right now. However, if tensions get worse, who knows what can happen?
In other words, China can’t bully organizations without paying stiff economic penalties.
But if you don’t like Nokia stock, you’re also well justified in your reasoning. Thanks in part to western investments, China is a much stronger beast than it was a decade ago. So, they may feel emboldened to push the issue.
Personally, with all the information that is available, I think NOK has a shot at some upside. But I must warn readers that this is a low-confidence idea due to geopolitical variables.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.