Nokia Corporation (NYSE:NOK) is an important player in the world of 5G network infrastructure. With the United States pulling out all the stops to slow down the rise of China’s Huawei, Nokia and Ericsson (Nasdaq:ERIC) stand to win by not losing.
That would be a nice change of pace because it’s been a rough ride for Nokia stock. In late 2007, it fetched nearly $40 per share. Today, it trades hands for closer to $4 per share, and during the COVID-19 scare it dropped below $3.
So, what happened? And what comes next for Nokia stock?
It seems like a lifetime ago, but Nokia used to be the biggest name in mobile phones. Of course, then a certain gentleman from Cupertino came along with the iPhone, and the rest is history.
Source: GuruFocus
Nokia is now a much smaller, slimmed-down company, though it may be on the cusp of a growth renaissance. Today, let’s do a deep dive on Nokia stock to see if there’s value in this former tech heavyweight.
Not the Nokia You Remember
Today’s Nokia operates mostly behind the scenes, building and servicing network equipment. Network infrastructure makes up 76% of its business. The company also licenses its vast portfolio of technology patents to other manufacturers in the space.
Nokia largely got out of the consumer electronics business in 2013 when it sold its mobile devices business to Microsoft (Nasdaq:MSFT). Nokia handsets still exist, though they’re no longer make by Nokia; they’re made by a fellow Finnish company that licenses the name.
That’s ok. Following its descent into obsolescence as a handset maker, Nokia doubled down on its network equipment business and by late 2016 had stabilized its business. While the company’s top line revenues haven’t grown much (the chart below shows trailing 12 months of revenues), Nokia was at least able to stop the bleeding.
Source: GuruFocus
Nokia Stock is Cheap
While Nokia’s business has stabilized, the shares have struggled to catch a bid. As a result, the shares have gotten cheaper and cheaper, and Nokia stock today trades at at price/sales ratio that has been chopped in half since 2016.
Source:GuruFocus
Of course, a cheap stock can stay cheap forever in the absence of a catalyst to send it higher. And it just so happens that that catalyst has presented itself.
The Catalyst?
Normally, telecom equipment wouldn’t be an especially exciting sector. But nothing about 2020 is normal. Telecom equipment is the focus on the cold war brewing between the United States and China. China’s Huawei is accused, among other things, of allowing the Chinese government to use its equipment to spy on Western companies and governments. Apparently bending to U.S. pressure, the UK announced earlier this month that it would be removing Huawei equipment from its national 5G infrastructure. This follows moves by Australia, Canada, Japan and Germany to either completely ban or at least greatly limit Huawei’s presence on their networks.
Every contract lost to Huawei is a contract to be gained by its competitors and specifically Nokia and Ericsson. At one point earlier this year, Attorney General William Barr even openly suggested that the U.S. government could buy stakes in the two companies as a way of strengthening them.
This is often viewed as a “Trump vs China” narrative, and President Trump has certainly been a vocal critic of China. But regardless of who wins the November presidential election, the war on Huawei isn’t likely to end. Western governments are uncomfortable with a Chinese company with strong ties to the Chinese government controlling large chunks of critical infrastructure. You’ll see Huawei increasingly getting squeezed out, and Nokia will be there to take its market share.
Bottom Line on Nokia Stock
Nokia stock has been dead money for years. Huawei was undercutting it on price, squeezing its margins. But with that trend now firmly in reverse, Nokia should enjoy a much better competitive environment. The shares look to have bottomed in March and are already in positive territory for the year. The company could face retaliation from China, which would hurt its businesses there. But with the West needing a 5G champion, Nokia is officially too big to fail.
