By Leo Sun; The Motley Fool ~ Jul 12, 2020
Nokia (NYSE:NOK) was once one of the world’s top mobile phone makers, but it sold its handset unit to Microsoft (NASDAQ:MSFT) in 2014. The Finnish company subsequently focused on growing its Nokia Networks business, which sells telecom equipment to carriers.
Nokia bought its rival Alcatel-Lucent in 2016 to expand that business and become the world’s second-largest telecom equipment company. It controlled 16% of the market by revenue last year, according to Dell’Oro Group, compared to Huawei’s 28% share and Ericsson’s (NASDAQ:ERIC) 14% share.
Nokia’s own phones also returned to the market in 2016, after Microsoft transferred its handset assets to a new company called HMD Global. HMD now produces all Nokia-branded phones, and Nokia’s smaller Nokia Technologies unit earns royalties and licensing fees from the deal.
Those deals all transformed Nokia, but its stock tumbled about 35% over the past five years due to tough competition, troubles in China, and a slower-than-expected ramp up of 5G upgrades. The recent resignation of its longtime CEO, layoffs across Finland, and the suspension of its dividend further rattled investors. But looking into the next five years, will Nokia’s stock rebound as it overcomes its near-term challenges?
Nokia could give up on China
Back in 2018, China Mobile (NYSE:CHL), the country’s largest telecom company, contracted Nokia to provide equipment for its regional optical transport network. Last year, China Mobile chose Nokia, Ericsson, Huawei, and ZTE as the four suppliers of the first phase of its 5G rollout.
For a while, Nokia’s business in China looked promising. But throughout 2019 Nokia struggled to keep pace with its Chinese rivals, Huawei and ZTE (OTC:ZTCO.Y), which often sold cheaper equipment. The evolution of the trade war into a tech war also made it tougher for Nokia to win Chinese contracts. As a result, Nokia’s sales in China, which accounted for 8% of its top line, fell 15% last year.
Earlier this year, China Mobile dropped Nokia from its second round of 5G upgrades and split the remaining orders among the other three companies. That loss stung, and indicates Nokia’s other businesses in China — including a joint venture and a contract with China Unicom — could be in trouble.
Nokia hasn’t offered a turnaround plan for its Chinese business yet. Instead, it excluded China from its global 4G/5G mobile radio market share projections for 2020, which are expected to hold steady year-over-year at 27%. That exclusion suggests Nokia is quietly giving up on China, which could become the world’s largest 5G market by 2025, according to research firm BuddeComm.
But it could also win orders from Huawei
The tech war clearly hurts Nokia’s business in China, but the company could still win orders from Huawei in overseas markets that want to curb their dependence on Chinese technologies.
Earlier this year, France’s top telecom company Orange stated it would only award its 5G contracts to Nokia and Ericsson, not Huawei. Huawei was also cut out of the loop in Singapore, where the country’s main 5G contracts were awarded to Nokia and Ericsson. Huawei also faces potential bans in India amid escalating military tensions with China.
The United States is finalizing a ban on the government doing business with any company that uses products from Huawei and four other Chinese tech companies. That massive ban, which is being implemented due to national security concerns, could force a lot of companies to buy new equipment from Nokia and Ericsson.
In short, Huawei’s pain could generate long-term gains for Nokia and offset its losses in China. However, Nokia will still need to outmaneuver Ericsson, which managed to remain China Mobile’s 5G supplier as Nokia was left out in the cold. Ericsson’s affiliate, Ericsson Nikola Tesla, also recently won an exclusive 5G contract in Croatia — which could act as a springboard to Eastern Europe.
Could Nokia be acquired?
Analysts expect Nokia’s recent troubles to reduce its revenue by 4% and 8%, respectively, this year. However, the stock’s lackluster performance has generated plenty of buyout buzz for the company.
It’s unlikely European regulators would allow Chinese companies like Huawei and ZTE to buy Nokia, but a merger with Ericsson could create a formidable market leader. Earlier this year, U.S. Attorney General William Barr even suggested the U.S. government could buy stakes in Nokia and Ericsson to “blunt” Huawei’s “drive to domination.”
A buyout of Nokia, which has an enterprise value of about $24 billion, would be a massive task. But it could certainly happen over the next five years as the 5G market matures and the tech war intensifies.
Where will Nokia be in five years?
Nokia will remain one of the world’s top telecom equipment companies, but its stock could continue to underperform the market unless it gets acquired. It’s giving up on one of the world’s largest 5G markets, and it’s unclear if it can beat Ericsson to claim Huawei’s lost orders in other countries.
Nokia is also bringing in a new CEO, who currently leads the energy company Fortum, and cutting costs, when it really needs an experienced leader and aggressive expansion strategies. Unless Nokia addresses these issues, the next five years could be as rough as the previous five.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun owns shares of China Mobile. The Motley Fool owns shares of and recommends Microsoft and recommends the following options: short January 2021 $115 calls on Microsoft and long January 2021 $85 calls on Microsoft. The Motley Fool has a disclosure policy.