The 5G race is heating up nicely, with a few major players holding the sector’s lion’s share. Telecom equipment giant Nokia (NYSE:NOK) looked to be the most promising of the lot but is now lagging behind its competition. That is evident in the NOK stock price, which has averaged at a meager $4 since the beginning of the year.
Its competitors Huawei and Ericsson (NASDAQ:ERIC) are ramping up their investments in 5G and continue to win significant contracts. Hence, Nokia needs to pull its socks up quickly before it enters penny stock territory.
Of course, the central talking point in the 5G space has been Huawei’s debacle on the international front. The US government accused it of being in cahoots with the Chinese government to spy on the country.
Other countries have followed suit and imposed harsh restrictions on Huawei. However, Nokia has been unable to take advantage of Huawei’s plight.
I suspect that tensions between China and the U.S. to ease under President-elect Joe Biden’s administration. Such a scenario could bring Huawei back in the game, further limiting Nokia and Ericsson’s influence in the international 5G arena.
The Future of Huawei and NOK Stock
The Trump-era appears to be over, and President-elect Joe Biden’s win will usher in several U.S. foreign policy changes. Judging from Biden’s track record, he is likely to employ a diplomacy-intensive model in attempts to restore transatlantic relations.
Therefore, the U.S. is likely to mobilize its allies and engage in more cordial relations with them. The country’s adversarial style with China should also change in the long run.
Even should the U.S. might maintain its position on Huawei it is likely to be a much softer stance, and the US would not push other countries to follow its policy. Hence, the real question is whether 5G players such as Nokia could compete with Huawei on a level playing field.
Huawei’s revenues last year were roughly four times higher in comparison to Nokia. Additionally, it also has the firm backing of the Chinese government. Huawei’s domestic market is massive, and the government’s support essentially solidifies its position domestically.
Moreover, many of the companies in the West are likely to have their opportunities diminish in China if such geopolitical tensions remain. Therefore, I expect Chinese relations with the West to improve, making it difficult for 5G players to establish their supremacy.
Things aren’t looking pretty for Nokia, and it needs to turn things around quickly to stay in the 5G race. That is why it cuts costs and plants to invest the bulk of its funds in 5G-related research and development. However, it would need to wait for a couple of years before it reaps the benefits of increased spending.
If the company fails to secure major 5G contracts, its revenues will take a substantial hit. More than 50% of its revenues come from its mobile access business.
Its earnings results have been a mixed bag for several quarters and will follow a similar pattern in the near-term. Nokia had previously set its operating margin target of 9% but is now between 7% and 10%.
In CEO Pekka Lundmark’s words, “We have lost share at one large North American customer, see some margin pressure in that market, and believe we need to increase R&D investments further to ensure leadership in 5G.”
Bottom Line on Nokia Stock
It’s been Groundhog Day for Nokia stock investors for the past year, as its price seems to be locked around $4. Unfortunately, I don’t think things will change much for Nokia’s investors unless it signs some major 5G contracts in the near-term.
Its financial outlook looks challenging in 2021, and it needs to make some meaningful changes before things get worse. If geopolitical tensions between China and other countries ease off, Huawei could turn its fortunes around in the Western 5G market.
Hence, things could get even more complicated for Nokia, making it a highly unattractive 5G play at this time.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article