Before I get into my take on Nokia (NYSE:NOK), I should start with a disclosure. Among the myriad topics to cover in the equities sector, telecommunications may be my least favorite. So I’ll gladly declare that you should take my opinions about NOK stock with a massive grain of salt.
That said, the general consensus regarding its bullish argument appears to revolve around its comeback potential. As you know, the prior presidential administration’s crackdown on China’s Huawei due to security concerns shut the telecom giant out of key markets. Right there, you have a compelling fundamental argument for NOK stock, though the nuance of geopolitics makes it tricky.
But just as importantly, Nokia may benefit handsomely from a long overdue pivot. As InvestorPlace Markets Analyst Joanna Makris pointed out, years ago, “Nokia fumbled badly by choosing programmable chips, called FPGAs, for its wireless radios.” She went onto explain the following:
Although former CEO Rajeev Suri saw it as a key differentiator at the time, FPGAs are far more expensive than ASICs, which are made by semiconductor firms like Broadcom (NASDAQ:AVGO) and Marvell (NASDAQ:MRVL). They also consume more power. For Nokia, this decision has resulted in profit margin erosion and a reputation for inferior 5G equipment.
Now, Makris wrote, “Nokia is making a U-turn. The company has overhauled less than 40% of its equipment to ASICs,” though the “transition won’t be fully complete until the end of next year.” You can look at this dynamic from two angles. On one hand, “Nokia still has a long way to go before its costs go down.”
On the other hand, it’s the necessary step that the company needs to make. And betting on NOK stock now while everyone else is fearful or skeptical can lead to big gains down the line.
Technical Posture for NOK Stock Perplexingly Vague
This is not an easy investment to make. To be sure, betting on solid publicly traded companies that encountered rough waters offers tremendous upside potential. Once those waters fade, the equity unit will likely jump higher.
But the problem with NOK stock is that the headwinds are not ones you should dismiss outright. Makris further makes an excellent point in that while the bulls celebrate Nokia’s positive pivot, its competitors have not made that costly mistake.
Imagine qualifying last in a race. You have the opportunity to pass several competitors. But at the end of the race, you might only end up in the middle of the pack. On the other end, those who qualified higher wouldn’t have passed as many folks but their efforts would result in a superior ranking.
That to me seems to be where NOK stock currently sits. Earlier efforts are encouraging but Nokia only ended up passing back-markers. Now it faces the real competition, which makes the investment narrative both intriguing and frustrating.
Looking at the technicals, I don’t get an easier read. Indeed, the technical interpretation matches the fundamental implications behind NOK stock.
Based on the time-of-writing price of $5.10, NOK stock made a strong impression. On a year-to-date basis, shares have gained 31%. To be fair, it’s down nearly 6% over the trailing week. Still, the shares pushed higher, preventing a retest of its long-term support line.
Nevertheless, the challenge with Nokia stock is that it remains mired in a bearish trend channel that dates back to the start of the Great Recession. From the analysis above, the current price point isn’t enough to break above the channel. Therefore, we’re left in limbo: will it or won’t it?
Treat Nokia Like a Coin Toss
There’s an argument to be made that since the first quarter doldrums of 2020, the rise of NOK stock has been robust and confidence inspiring. I won’t necessarily disagree. It’s possible that Nokia shares can rally from here.
Still, I must say that we’ve seen this story before. In the second half of 2016, NOK attempted to break out of a declining trend. It was successful but it failed to break above the resistance line of the aforementioned bearish trend channel. Then, the novel coronavirus pandemic happened and everything went back to square one.
So, will this rally spark a different outcome now that the pandemic is fading in many parts of the world? This is where I go back to Makris’ argument. Yes, the rally is encouraging but it’s also true that the competition did not incur the missteps Nokia did. Therefore, I’m going to be on the skeptical side of things.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.