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Nokia is in a tug-of-war with China and 5G

Thursday, July 30, 2020 | Chris Markoch
Nokia is in a tug-of-war with China and 5G

The Finnish company Nokia (NYSE: NOK) reports earnings on July 31. The consensus of analysts is for Nokia to report earnings of 3 cents per share on revenue of $5.63 billion. Both numbers would be a gain from the prior quarter. And the revenue number would be in-line with the company’s results for the same quarter in 2019.

However Nokia is in a different spot than many other companies this earnings season. Nokia was benefiting as nations across the world restarted the 5G infrastructure build-out. And one of Nokia’s biggest customers was China Mobile (NYSE: CHL). In fact, one of the selling points for Nokia bulls was that it was winning 90% of its 5G contracts including those in China.

But right now, Nokia is caught in the middle of the escalating tensions between China and the United States. And it’s creating an interesting puzzle for investors to solve as the company gets ready to report earnings.

5G is the catalyst Nokia has been waiting for

Nokia has been on a long, slow road to reinventing itself. At one time, Nokia was a significant player in the mobile phone arena. But Nokia found itself with a declining market share in a highly competitive industry. As a result, Nokia stock has been falling for nearly five years and investors were losing patience.

The company made a pivot and 5G looked to be an opportunity to show what it could do. And it still might, but right now investors have to look at two competing scenarios. One in which Nokia is viewed as a villain; and one where it is a hero.

The tensions with China are just beginning

If I could recommend one book for you to read it would be, The China Price: The True Cost of Chinese Competitive Advantage. The book was written in 2008 by Financial Times correspondent Alexandria Harney. The book goes to great lengths in describing the competitive edge China generates from its factory economy.

Now I’ll give you fair warning, the book is not for those who have a closed mind about such things. That was particularly true 10 years ago. However, it is eerily prescient for our current political climate.

The United States and the world are beginning to understand the price that we are paying as China’s economy has emerged. And what started with an inconvenient, but ultimately benign, trade dispute has escalated. Each country’s government is openly hostile towards the other.

Let me just say right now, this is not a commentary on the novel coronavirus. That’s above my pay grade and expertise. The major issue that affects Nokia as it relates to China is intellectual property. And that leads us to Nokia’s problems with Huawei and China Mobile.

Nokia is caught in the middle

As I noted above, Nokia is losing business from China Mobile. And investors should be concerned about the company’s ability to win back China’s business. Particularly, since the business that’s not going to Nokia is going to its competitors primarily Huawei, but also possibly, Ericsson (NASDAQ: ERIC).

However, at the same time that is happening many foreign governments, including the United States, are trying to ban Huawei from their markets. In the United Kingdom, Boris Johnson recently announced a ban on all new Huawei 5G equipment in the United Kingdom effective December 31, 2020. And digital secretary Oliver Dowden is ordering all U.K. mobile providers to remove all Huawei equipment by 2027.

Furthermore, France and Singapore have recently awarded business to Nokia and Ericsson instead of Huawei. And this is leading to concerns that Huwaei may retaliate against both Nokia and Ericsson if the EU follows through on its actions.

Which story should investors pay more attention to?

Now that the U.S. and China have ripped off the bandage, the ideological dispute between the two countries is likely to last well into the next decade. Many companies will find themselves caught in the middle.

At the moment, being caught in the middle describes Nokia perfectly. The company is being frozen out of one of its most profitable markets. But it is also likely to have more opportunities as other countries look to move away from Huawei.  

It’s a tough call, and I admit it would be easier if Nokia had not cut their dividend in 2019. So it’s a tough call for value and growth investors. Given the fact that NOK stock sold off sharply in pre-market trading on June 30, it looks like investors may have already place their best. And that means I’d be very cautious about jumping on the Nokia bandwagon right now.

 

Companies Mentioned in This Article

CompanyBeat the Market™ RankCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Nokia Oyj (NOK)1.6$5.00-2.0%1.00%41.67Buy$4.60
China Mobile (CHL)2.4$35.58+2.1%5.62%9.56Hold$49.00
Telefonaktiebolaget LM Ericsson (ERIC)1.7$11.69-0.4%0.43%129.89Buy$11.33
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