Despite a nearly universal consensus that its shares are undervalued, Nokia (NYSE:NOK) can’t seem to sustain momentum. Since the market crash at the onset of the global pandemic, shares of Nokia climbed 52% by the beginning of August. However, since that point, the stock has given back nearly half those gains.
The question that investors need to start asking is why? Has the company simply gotten caught up in the broad sell off that continues to take place? Or is there more to the story for investors? I think it could be a little of both.
Huawei’s Pain Was Nokia’s Gain
Nokia has had a run of good fortune due to the dramatic shift in U.S.-China policy. In 2016, then-presidential candidate Donald Trump promised to take a hard line with China. It was a populist message that struck a chord with his base and helped propel him to the White House.
Putting aside any feelings you have for the President one way or another, on this particular subject, he has done what he said he would do. And by taking on Huawei, Trump opened the door for a company like Nokia to walk through.
And Nokia needed it. Right around the time President Trump was being inaugurated; Nokia was recovering from the walloping its stock took as a result of its purchase of Alcatel-Lucent. At a time when other companies were in the early stages of gearing up for 5G, Nokia fell behind.
The fact that Nokia can competitively bid in several markets has been essential to its resurgence. As I wrote about a month ago, much of Nokia’s growth in the near-term is tied to Europe. To that end, the company just signed an agreement with BT, the largest telecom company in the United Kingdom. This deal was facilitated in no small measure to Great Britain’s ban of Huawei 5G equipment from the country.
And this isn’t the only deal that Nokia has struck. In fact, earlier in October, the company officially reached the symbolically significant number of 100 5G contracts.
So Why Isn’t Nokia Stock Higher?
That’s a harder question to answer. Nokia had a terrible September. The company’s stock dropped by almost 18%. It was the worst monthly performance since last October. And in the past six months, Nokia’s growth of 23% lags behind the sector’s growth of over 38%.
Losing a bid for Verizon Communications (NYSE:VZ) business to Samsung (OTC:SSNLF) is the easy culprit. Still, a drop of 18% seems a bit extreme when you consider how big the 5G pie is.
Another reason for the sluggish stock performance may be due to the company just replacing its chief executive officer (CEO). Pekka Lundmark took the reins on Sept. 1. Nokia appointed a new board chairman as well. Although analysts seem to respect the hire, the stock is down 17% since Lundmark took over.
However, statistics can be deceiving. Since the last week of September, the stock appears to be trying to find a bottom. And with the company preparing to report earnings at the end of the month, there will likely be more interest in the stock.
Is Nokia a Buy?
In an interview with Barron’s, JP Morgan Chase (NYSE:JPM) analyst Sandeep Deshpande gave Nokia a bullish outlook including a $5.50 price target. Part of Deshpande’s outlook is based on what he sees as Nokia finally having caught up on the technology front.
That may be true. But as a counterweight to that, the company’s run of good fortune may be coming to an end.
When I wrote about Nokia a month ago, I cautioned investors to wait until after the U.S. presidential election to buy the stock. The election can’t come soon enough for any of us, but may last longer than any of us wish.
The outcome of the election, however, will have a significant impact on U.S.-China relations. And by extension, it will impact the level of attention or neglect our country bestows on Huawei.
The best thing Nokia can do right now is deliver a solid earnings report that shows a path to growth in 2021. If it does, investors will look at today’s price as a bargain. But with uncertainty surrounding the geopolitical landscape, it’s worth proceeding with caution.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.
