Is 5G a Tailwind or a Headwind for Nokia Stock?

Josh Enomoto

Mon, Sep 23, 2019, 8:00 AM

The price action for the last two months is a perfect representation of the opportunity and risk behind Nokia (NYSE:NOK). On one hand, you have the societally and economically transformative potential of the 5G network bolstering the longer-term argument for Nokia stock. But on the other hand, fundamental and competitive risks cloud that narrative.

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In July of this year, I voiced my doubts about Nokia stock. Primarily, I cited the lack of technical enthusiasm as a risk factor. Although the company has been wheeling and dealing, securing contracts with big players like China Mobile (NYSE:CHL), Sprint (NYSE:S), T-Mobile (NASDAQ:TMUS) and BT Group (NYSE:BT), the enthusiasm had failed to reflect themselves into the equity value. As a result, NOK stock has been rangebound since the spring of 2016. Naturally, this doesn’t inspire confidence.

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However, I was quickly proven wrong. In Nokia’s second quarter of 2019 earnings report, the telecom firm produced a surprising beat. While consensus forecasts called for earnings per share of 0.03 euros, NOK delivered 0.05 euros. Moreover, the company generated $6.34 billion in revenue, up 7% from the year-ago quarter.

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After the disclosure, the Nokia stock price skyrocketed (though not enough to break NOK out of its 3-year trading range).

But it wasn’t just the print that satisfied investors. In past years, Nokia’s business along with the competition soured after 4G network sales peak. But with the 5G rollout, the new technology offers a fresh cycle for telecom firms. That’s what Nokia’s results confirmed, justifying the spike in NOK stock.

Still, the bullishness was short lived. Nokia stock plummeted and has only recently started to look alive. So, which narrative is going to win out?

Tailwinds for NOK Stock Are Interesting, but so Are the Risks

Undoubtedly, the 5G narrative for NOK stock is alluring. As InvestorPlace contributor Theodore Kim pointed out, we’re in the early stages of a global rollout. As he put it:

The market for 5G will likely not take off until 2020. But when it does, users across the globe will need a brand new 5G standard smartphone. Carriers will sink billions into new 5G equipment. And Nokia will be positioned front and center in offering the new hardware across the globe.

As a standard is established for this next-generation tech, only Nokia and Huawei will find themselves with comprehensive product and service solutions. But as we all know, Huawei is at the heart of a security debate that has underlined the U.S.-China trade war. The U.S. accuses Huawei of being a conduit for China-sponsored espionage.

Of course, that benefits NOK stock, at least on the public relations front. No one is accusing the company of any such breach of trust. More importantly, this controversy gives Nokia an opportunity to work some uncontested deals.

But the problem here is that they’re not uncontested. Yes, 5G is a transformative innovation, one that augurs well for NOK stock. But it also provides the same opportunities for the competition. For example, regional rival Ericsson (NASDAQ:ERIC) isn’t going to stand by and let Nokia have all the fun.

From a share price perspective, both telecom stocks have similar dynamics, largely going rangebound over the last few years. Both are eager to capitalize on the 5G rollout. As such, a risk exists that the two will engage in a price war, which would hurt profit margins.

Plus, a recession in Europe would exacerbate this possible contentious situation.

5G Isn’t Exactly Perfect

Although I’m bullish on many companies that are levered to the 5G rollout, it’s important to realize that it’s not a panacea for underperforming organizations.

While the tech generates excitement, the rollout itself has been somewhat slow. A big part of that is the expense involved in upgrading equipment to accommodate the new signals. Also, because the 5G waves are shorter and more intense, they require different cell infrastructure compared to 4G.

Ironically, another costly factor is security. With or without Huawei, 5G requires advanced network safety protocols. That eats into profitability, negatively impacting companies that are fiscally sensitive.

Overall, though, you cannot dismiss the excitement factor of the rollout. Thus, we could very well see the kind of momentum that lifted Nokia stock following Q2. But it’s also fair to bring up the long-term wildness in NOK. It really hasn’t earned investor trust.

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Therefore, if you want to speculate on the emotions of 5G — and not necessarily its fundamentals — I must say that shares look interesting. That said, do make sure to pocket profits. The longer-term charts tell us that this will probably not be an easy ride.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.