• Sagar Agrawal

5G technology: 21st century telcos, market turmoil and the Nokia story

Source: FT

Apocryphal stories of investors presented with the AAPL/NOK dilemma in the mid-noughties have remained ubiquitous at dinner tables, providing a powerful example of the importance of stock diversification, but more far-reaching are the lessons it provides for investing in the direction of next-generation technologies.

5G was never going to enter the market quietly, nor quickly. The process will almost inevitably follow the same path as that of its predecessors in 3G and 4G. It has indeed embarked on the same journey, causing fairly minimal disruption in the 2020 launch that we have seen in the West due to the low accessibility for the masses. Professor Mohanbir Sawhney of Northwestern University then predicts, as was seen with 4G, that it will only reach its market potential in the mid-2020s, developing into a fully-fledged market giant. There are added layers of complexity this time however and this could mean that its roll-out time is further exaggerated; 5G has three constituent frequency band tiers: low-, mid- and high-band radio frequencies. Cellular phones use radio tuners to automatically select optimal radio frequencies and 5G innovation enables your phone to tune into multiple types of frequency at the same time.

Low-band has been unveiled by T-Mobile in the US and its nationwide expansion only provides speeds roughly twice as fast as 4G, which is not the scale of improvement expected from a 5G network. On the other hand, AT&T and Verizon have announced faster 5G networks which will operate at higher frequencies but over smaller areas. Reliance on expanded coverage and US accusations of Huawei as a “conduit to Chinese intelligence” will mean that the technology will get greater and faster traction in the East. Some analysts have been raising alarm bells that the writing could already be on the wall with Samsung and Huawei some way ahead of Apple in getting 5G compatibility on their new devices. In the long-term this is likely to be misguided speculation and the political moves that the US has been making, justified by headlines likening Huawei infrastructure integration to the Trojan horse “capable of giving China effective control of the digital commanding heights” have been contradicted by intelligence services, notably including MI5. Whilst the intentions are transparent and will lead to a greater divide between the two superpowers, this is very prudent politics, ensuring that US companies retain sector control.

Technologies have proved resilient to the changing marketplace in the COVID-era and so whilst there is likely to be greater appetite for technological investment, the inception of new technologies, particularly ones as disruptive as 5G is capable of being, always prove to be anything but smooth and it’s doubtful 5G will prove an exception. From media firestorms about conspiracy theories surrounding its role in the spreading of coronavirus to the revelation from Pompeo that the US is not willing to share intelligence with countries that use Huawei 5G infrastructure, 5G is at the forefront of the emergent US-China proxy war.

That’s where Nokia enters the picture. It could be ideally placed to profit from the political pressure being exerted by the United States on its global partners (NATO members) alongside Ericsson. Losing their lowest-cost rival in wireless-network equipment should provide revitalization for these past giants. Despite this, Nokia’s executives were hesitant to trumpet such prospects of market share gains for fear of risking sales in the largest telecom-equipment market by angering China, so says Krishna Chintalapalli, a telecoms analyst at Ariel investments. There is certainly cause for optimism however, and more so for Nokia than Ericsson due to the removal of Huawei’s competition in the optical and routing business, the diversity in its business and its more attractive valuation, reasons why Raymond James analyst Simon Leopold leans towards Nokia. With it’s recent price of $3.98, Nokia trades at roughly 25 times earnings-per-share estimate for the next year, slightly below its five-year average and Leopold sees an 18% upside for the stock based on its Outperform rating. He uses the analogy “any transition is like turning around an oil tanker situation, it can take multiple quarters, even more”. Ushering in this new technology may then prove a gradual evolution rather than revolution.

Have we then reached another NOK dilemma? Perhaps. This time, with the exception of Huawei, there are unlikely to be any losers. Certainly, Nokia is one to watch in the short-term and only in the next few years will it become clear what firms in other sectors can capitalize on the changes that 5G brings in. The introduction of technology capable of relaying such volumes of data could completely transform technology from wearables to healthcare and with such a fast-moving market, the relatively slow ushering in of 5G over the next half decade could see other smaller players making big ground. The change then, whilst a disruptive influence, lacks comparison with the 2007 introduction of the iPhone which put Nokia to the sword and we are unlikely to overhear investors in decades to come discussing their unsuccessful navigation of the 5G waters and their lost fortune in choosing Ericsson over Nokia.