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Nokia Can Win the 5G Battle

Nokia (NYSE:NOK) stock remains central to the plot in the 5G story globally. Though in some sense, Nokia is the laggard among the three main characters in this narrative, it could end up being the champion. And while the company has benefited from being America’s adopted horse in this race, it has some merit in its own right. 

Dark clouds over Nokia (NOK) brand name on top of a building in Helsinki, Finland
Source: RistoH / Shutterstock.com

At this point, the 5G race is primarily a competition to land as many commercial contracts as possible. Nokia announced on Oct. 2 that it had reached its 100th commercial 5G deal, but it was the last major infrastructure provider to reach that milestone.

Investors therefore need to take the positive news with a grain of salt. Investors should also understand that an investment in Nokia stock is an investment in something bigger than the company alone. 

A Running Tally of 5G Commercial Contracts

Ericsson (NYSE:ERIC)announced that it had obtained 100 commercial 5G deals back on Aug. 12. Huawei has not updated its commercial-contract total since February. At that time, it was leading the race with 91 contracts compared to Ericsson’s 81 and Nokia’s 63.

It is probably safe to assume that Huawei was the first to secure 100 5G commercial contracts  and that it remains the leader of that category. 

Nokia has launched 34 5G networks. And while the company has 100 commercial contracts, it has 160 “engagements.” That indicates that the company is conducting 60 paid trials.

Nokia will convert some of those trials into commercial contracts. As it does so, Nokia stock should attract more buyers. That said, investors have plenty of questions about Nokia and its stock. 

Will Nokia Provide Returns on Deals?

Investors are right to question whether Nokia will be able to secure many more commercial 5G contracts. Any vendor’s ability to make sales up front allows it to prove its mettle and sell additional services and goods later.

But investors should also question the extent to which Nokia can profit from those deals. Unfortunately, Nokia has shown that it doesn’t use capital efficiently, as its cost of capital exceeds its returns on invested capital.

Ericsson is also capital inefficient. But unfortunately for Nokia, other companies in the telecommunications hardware industry are not in the same boat.

That isn’t a reason to dump Nokia stock on its own, but investors should hope the trend reverses as Nokia’s 5G networks are completed. 

Momentum Stunted

Nokia’s shares managed to pop out of their pandemic trough and steadily appreciate into August. By that time, Nokia stock had risen by roughly 100%.

Some investors began to wonder if Nokia stock price would continue moving closer to that of Ericsson. Unfortunately Nokia gave up those gains and now is below $4 while Ericsson is trading near $11.

On August 1, Pekka Lundmark began his tenure as Nokia’s CEO. While the company has continued to land 5G commercial contracts since then, his tenure is off to a bad start when it comes to Nokia’s share price. 

During the tenure of Nokia’s previous CEO, Rajeev Suri,  Nokia stock fell by 50%, leading to calls for his dismissal. However,  Nokia has a massive, positive catalyst now. 

What’s at Stake?

It is no secret that the Trump administration is trying to stop China from becoming dominant in the telecommunications  sector. To further that goal, it has hit Huawei with tough sanctions and restrictions. Yet Huawei’s share of global telecom revenue continues to climb, hitting 32% this year, according to Dell’Oro Group.  Meanwhile, while the market shares of Ericsson and Nokia Corp. have shrunk.

According to Senator Mark Warner, a farmer telecommunications executive, there is a point of no return.

“We’ve been told that if Huawei is able to gain 50% global market share, it will send Ericsson or Nokia—and potentially in the longer term, both—into a tailspin,” 

If that scenario unfolds, China will set communications standards. As the dominant global force in telecommunications, the U.S. has long set those standards.

Pundits worry that a Chinese takeover would threaten the freedom and openness of communications. Some are also arguing that China is shrouded in secrecy and allowing it to control data standards poses unacceptable risks to global security. 

The Verdict on Nokia Stock

Nokia is operating within a geopolitical game that is bigger than it is. Currently, geopolitics favor Nokia. There is almost zero chance that Nokia could fall out of favor in the West because the U.S. and other nations have concluded that China must not win the 5G race. Therefore Ericsson and Nokia will very likely win the most 5G commercial contracts  in the Americas and parts of Europe. 

Although Nokia has some less-than-favorable metrics and other problems, Nokia will be a winner. Analysts are upbeat on its chances, but the process is going to take time.

Investors can buy Nokia stock now and wait or hold off for awhile before pulling the trigger. I don’t believe that the shares are going to appreciate quickly, since the installation of  5G will take a long time. 

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/10/nokia-can-win-the-5g-battle/.

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