Once-iconic cellphone manufacturer turned telecommunications network equipment maker, Nokia (NYSE:NOK) has consistently tested investors’ patience. Having ceded its dominant position in mobile to Apple (NASDAQ:AAPL), the Finnish telecom firm has shifted its eyes toward 5G. But even with this transformation, the company continues to disappoint.
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One only needs to look at Nokia’s equity value to recognize the overwhelming challenge management faces. Just prior to releasing its results for the third quarter of 2019, Nokia shares had already lost more than 7%. In contrast, shares of regional telecom rival Ericsson (NASDAQ:ERIC) were up nearly 9% in the same timeframe.
But the real bleeding happened after the Q3 report. Again disappointed, investors took no time mercilessly pummeling Nokia’s equity. In the aftermath, shares limped home to a 2019 loss of almost 33%.
On the surface, management’s decision to slash its 2019 and 2020 profitability outlook was the main culprit for Nokia’s terrible losses in the markets. Furthermore, the leadership team cited increased competition in the 5G space, with many tech firms eager to take share in the early stages of the rollout.
While that no doubt added to the company’s long and growing list of woes, it’s the reason for the slashed outlook that most concerns stakeholders. Up until the Q3 disclosure, Nokia was committed to utilizing field-programmable gate array (FPGA) integrated circuits for its 5G products.
FPGAs have the advantage of post-manufacturing flexibility and programmability. Essentially, this allows Nokia’s customers to configure their equipment to address specific needs. However, FPGAs have one critical drawback, at least from a fiscal perspective: they’re incredibly expensive.
Nokia, or more specifically its customers, found this out the hard way in Q3.
Nokia Bumbles Toward the 5G Rollout
Naturally, you can see why Wall Street was hardly amused at the admission. A company that’s as fiscally vulnerable as Nokia shouldn’t have taken such big risks. Frankly, they’re in no position to recover if they misfire. And most investors viewed the FPGA fiasco as a misfire, punishing shares severely.
But it gets worse. In order to make up for the mistake, the company’s executives stated that they will shift to system on chip (SoC) integrated circuits. That might resolve the cost issue associated with the FPGA rollout. However, it makes the company appear as if they’re bumbling toward the 5G revolution by accident rather than by choice.
More importantly, Nokia is now well behind in the 5G race. Currently, 5G’s chip leader is Qualcomm (NASDAQ:QCOM), which developed its Snapdragon 7 5G-capable platform using SoC circuits. That means Nokia spent time they can’t afford to lose chasing an economically unsustainable platform.
At this point, covering analysts saw the writing on the wall. Qualcomm, with its infinitely more stable financial status, apparently eschewed FPGA for cost reasons. Why then did the substantially weaker Nokia pursue this circuit platform?
To be fair, management declared that they’re pulling out all the stops to push out SoC-based 5G products. During the Q3 conference call, they disclosed that they hired hundreds of workers to accelerate the chipmaking process.
Here’s the thing: Nokia’s shares have been speculative for several years. A substantive recovery by itself would have been a herculean task. But now, the telecom firm is behind the eight-ball against some of the biggest titans in the industry.
In other words, this is an organization that lacks credibility, yet it’s asking investors for patience. Well, I’m afraid that patience is gone.
A Low-Confidence Speculative Gamble
Despite the dark cloud surrounding Nokia, not everything about the company is a wash. Admittedly, the company has inked many 5G-related deals. Moreover, the geopolitical situation between the U.S. and China helps the Finnish company.
Sure, the two nations are engaged in promising talks to sign a phase one trade deal. But phase one is merely the trailer to the final screening. Based on recent history, a lot can go wrong until then. And if it does, Nokia is a much more trusted name than Huawei.
Plus, with shares as deflated as they are, speculators with “dumb money” may want to take a shot. For everyone else, this is a name to avoid.
Although 5G is a promising market, as management acknowledges, the competition has grown fierce. Further, Nokia has limped along in survival mode, needing to do everything right and some stars to align. But management has already made a critical mistake. This makes a seemingly impossible mission more difficult.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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