Shares of Nokia Corporation NOK have declined 37.8% so far this year (as of Dec 26, 2019), making it one of the worst performers in the Zacks Wireless Equipment industry. The company appears to be plagued by high costs associated with its first generation 5G products, profitability challenges in China, pricing pressure in early 5G deals, and uncertainty related to the announced operator merger in North America.
What Ails Nokia?
The success of 5G hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support anticipated growth in data services. With operators moving toward converged or multi-use network structures, combining voice, video and data communications into a single network, the industry is increasingly developing solutions to support wireline and wireless network convergence. Although these investments will eventually help minimize service delivery costs to support broadband competition, rural coverage and wireless densification, short-term profitability has largely been compromised.
Nokia has largely fallen prey to these malaises as it faced high 5G product costs in Networks, as well as elevated levels of deployment service costs consistent with the initial phase of 5G. Paucity of demand due to geopolitical uncertainty and challenging macroeconomic environment has dented margins. Net sales were negatively impacted by temporary capital expenditure constraints in North America related to proposed merger of T-Mobile US, Inc. TMUS and Sprint Corporation S, as well as competitive pressure in Greater China. The decrease in Fixed Access was primarily due to a shift in capital expenditures from fixed access to 5G wireless access.
Down But Not Out
Despite a dismal performance in 2019, Nokia remains focused on four key priorities. The first priority of the company is to lead in high-performance end-to-end networks with its communication service provider customers. Secondly, Nokia aims to expand network sales to select vertical markets, specifically energy, transportation, public sector, technical extra-large enterprises and webscale players such as Alphabet Inc. GOOGL and Amazon.com, Inc. Building a strong standalone software business remains the third strategic priority. The fourth pillar aims to create new business and licensing opportunities in the consumer ecosystem.
In order to strengthen its leading position in the market, Nokia facilitates its customers to move away from an economy-of-scale network operating model to demand-driven operations by offering easy programmability and flexible automation needed to support dynamic operations, reduce complexity and improve efficiency. The company seeks to expand its business into targeted, high-growth and high-margin vertical markets to address growth opportunities beyond its traditional primary markets. The ramp up of next-generation 5G networks is likely to improve market conditions considerably through 2020 and beyond.
This Finland-based telecom equipment manufacturer has secured more than 50 commercial 5G deals worldwide from diverse firms. Much of this healthy deal momentum can be attributed to the company’s solid foundation of mutual trust and confidence from the existing pool of customers that enabled seamless transition from 4G to 5G. In addition, growing resentment about alleged attempts of data siphoning by Huawei has tilted the scales in favor of Nokia, despite the former’s low-price advantage. In particular, this Zacks Rank #3 (Hold) stock has witnessed strong customer interests from Nordic countries as European firms largely stood by President Trump’s univocal calls to stop using the Chinese telecom equipment on security concerns. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Nokia is well positioned for the ongoing technology cycle given the strength of its end-to-end portfolio. Its installed base of high-capacity AirScale product, which enables customers to quickly upgrade to 5G, is growing fast. The company is driving the transition of global enterprises into smart virtual networks by creating a single network for all services, converging mobile and fixed broadband, IP routing and optical networks with the software and services to manage them. Leveraging state-of-the-art technology, Nokia is transforming the way people and things communicate and connect with each other. These include seamless transition to 5G technology, ultra-broadband access, IP and Software Defined Networking, cloud applications and IoT.
With such inherent growth potential, Nokia is likely to script a turnaround in the near future and benefit investors in the long run.
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