The price of Nokia’s (NYSE:NOK) stock is still cheap with a $5 handle, but it’s more than doubled off its March lows. The rally of Nokia stock indicates that the company’s new leadership and the 5G boom are legitimate positive catalysts for the Finnish telecom gear maker.
CEO Pekka Lundmark, who was a Nokia executive years ago before departing for other opportunities, returned to the firm earlier this month. And while he still has plenty of work to do, investors are excited about his efforts to boost Nokia’s margins.
There are several aspects of Nokia to like going forward. First, the company posted decent second-quarter results in a trying environment. Nokia’s profitability jumped even as its revenue was bogged down by the Covid-19 pandemic. Second, the stock is soaring even though the Finnish firm did not win any 5G business in China, confirming that market participants think the company has other 5G opportunities.
The China scenario isn’t surprising because Huawei, a Nokia rival, is a Chinese company and has come under increasing scrutiny by Western governments. As a result, Beijing’s decision to boost its homegrown company should have been expected.
Third, Lundmark has plans, which are being kept mum for now, for Nokia’s products. At this point, nothing is known about those plans. But an increased focus on the firm’s higher-margin business is likely, and Nokia may also shed its lagging and ill-fitting offerings.
Nokia Stock Is a Smart 5G Bet
For investors, Nokia is a diversified 5G play, covering bases from complex systems to handsets.
Nokia was once one of the dominant names in handsets, a status it eventually ceded to rivals because it largely missed out on the smartphone boom. It probably won’t ever restore that lost dominance, but Nokia can fill niches that will be rewarding for itself and its investors.
A prime example of one of those niches is affordable 5G phones. Apple (NASDAQ:AAPL) and some Android-powered 5G phones are likely to cost more than $1,000 each.
Conversely, Nokia is planning to make “accessible” 5G phones for the U.S. market, and carriers have already committed to offer those devices.
And while the company is being shut out of China, it’s not missing out on business in some other lucrative Asian markets. For example, Nokia will be the sole seller of 5G New Radio and 5G core technologies to Taiwanese telecom giant Asia Pacific Telecom.
In the U.S., Nokia is using its AirScale mmWave radio products with Cloud RAN capabilities to fortify the 5G infrastructure of U.S. Cellular. With Huawei at the epicenter of the U.S.-China trade dispute and the White House viewing the Chinese company as a national security risk, the door is ajar for Nokia to win plenty of 5G business in the U.S.
The Bottom Line
Nokia is also a play on industry eventually returning to normal after the pandemic. Although its Q2 earnings were surprisingly sturdy, the company did have to postpone almost $600 million of revenue to the back half of this year because of Covid-19.
As a consequence, Nokia modestly boosted its estimates for the second half of the year, but there’s more.
Nokia is often viewed as a network/infrastructure company, leaving its software business overlooked. However, Nokia’s software unit could be a significant driver of future returns for the company. That’s because it not only allows customers to enhance their 5G capabilities, but it sells products used by other fast-growing segments, such as cloud computing and the Internet of Things.
Every investor should consider buying Nokia stock to benefit from the 5G boom. And patient investors should wait for the market to discover its software opportunity.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.