Nokia Stock Won’t Escape Geopolitics Forever

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To be fair, tensions between the U.S. and China were reaching a boiling point before the novel coronavirus became part of our everyday lexicon. But the pandemic only exacerbated the ugly feelings underlining this pivotal economic relationship, undoing what looked to be a promising reset earlier this year. This has significant implications for far-reaching businesses like Nokia (NYSE:NOK). But at least on the surface, tensions appear to be favorable for Nokia stock.

a backdrop featuring the Nokia (NOK) logo with a mobile phone featuring the Nokia logo on its screen in the foreground
Source: rafapress / Shutterstock.com

Prior to everything being uprooted, China’s Huawei was a major player in the global 5G rollout. As with most things China-based, Huawei had significant advantages.

First and foremost, it could develop technologies and infrastructure far cheaper than western competitors. Second, China is home to 1.4 billion people. While they’re not all connected, Huawei had home growth opportunities that were the envy of other telecom players.

But with accusations of intellectual property theft that led to an ugly, protracted trade war, Huawei increasingly lost its foothold. Not only did the Trump administration target Huawei, governmental measures disincentivized other nations from doing business with the Chinese company. Suddenly, Huawei went from the top of the food chain to everyone’s prey.

Cynically, though, this circumstance favored Nokia stock.

With a major competitor out of the way, NOK along with regional rival Ericsson (NASDAQ:ERIC) had a much clearer path to revenue expansion. Of course, nothing is quite so simple in the complex telecommunications world. This past summer, Beijing threatened to impose export controls on foreign companies doing business in China.

Still, such draconian measures would hurt the world’s second-biggest economy as many international vendors already implemented mitigation measures following the U.S.-China trade war.

Nokia Stock Remains Beholden to Geopolitics

However, if you wanted to jump on Nokia stock, you may want to think carefully before you do. For now, it appears that a dramatic technology showdown won’t negatively impact Nokia. But on a longer-term horizon, trouble is brewing.

Personally, I think it’s a mistake to assume that the Chinese won’t find some way of defeating this broader tech deadlock. It may not happen today. And yes, Huawei is hurting badly from the deceleration in revenue channels. But China’s government think in terms of decades, if not centuries. In its eyes, this battle is far from over.

Recently, I covered Taiwan Semiconductor Manufacturing (NYSE:TSM), which is in a similar situation to Nokia stock. In short, due to a closing of a loophole by our government, TSM was effectively barred from doing business with Huawei. As well, the U.S. opened a new venture with TSM. So, all’s well that ends well, right?

Not so fast. Sure, Huawei now has to depend on China’s Semiconductor Manufacturing International (OTCMKTS:SMICY), which is years behind other semiconductor firms. Therefore, a common assumption is that TSM is protected from economic shock. However, China can pull out a familiar play from its playbook, “cheating.”

Well, it’s not quite cheating because frankly, we do the same thing. But the Chinese can implement a “brain drain” strategy, luring Taiwanese engineers to work for China’s top companies. Certainly, the country has the financial resources to do so.

In addition, the concept of the “splinternet,” or separate internet ecosystems ruled by eastern and western governments, is gaining credibility. For Nokia stock, this implies that there is a substantial risk that the underlying company could end up siding with the “wrong” team. And by wrong, I mean the region that lacks growth and profitability.

Possible Near-Term Speculative Opportunity

In the meantime, China is peddling backward because of the Trump administration’s attacks against Huawei and the country’s tech infrastructure. While the Chinese government will eventually respond, the impact likely won’t be felt for some time.

Plus, narratives like the splinternet will also need time to materialize. Further, some of the most lucrative markets on a per-capita basis are in the west. By closing themselves off from this market, China and its partners won’t have an easy way forward.

Therefore, it’s quite possible that Nokia stock could be a discounted buy, considering its recent volatility. But the red ink is a reminder that a clearer path to success doesn’t excuse one from execution. A few weeks back, Reuters reported that NOK lost out to Samsung in a 5G equipment deal with Verizon Communications (NYSE:VZ).

Ultimately, if you’re more of a conservative investor, you may want to wait this one out until the volatility eases up. I’ve said before that Nokia stock is a low-confidence buy. What I’m seeing recently doesn’t make me change my mind.

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

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.

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. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2020/10/nokia-stock-cannot-escape-geopolitics-forever/.

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