Telecom Equipment Providers Nokia and Ericsson Face Dim Outlook

Shares of telecom equipment providers Nokia and Ericsson are trading lower on Friday after Barclays analyst Joseph Zhou warned that the outlook looks dim for both companies.

Ratings Downgrade

In a research note, Zhou cut his ratings on both stocks to Underweight from Equal Weight. This downgrade comes as a result of his concerns about the future performance of Nokia and Ericsson.

Revised Targets

Zhou has revised his target price for Ericsson's Stockholm-listed shares to 55 krona, down from 65 SEK. As a result, shares are currently down 3.8% to 61.67 SEK. For Nokia's Finland-listed shares, the new target price is 3 euros, down from €4.60. The stock in Helsinki has dropped 2.1% to €3.13.

US Trading Performance

In US trading, American depositary receipts of Ericsson and Nokia have seen declines of 4.5% and 2.3% respectively.

Decreased Estimates

The analyst has also sharply reduced his estimates on both companies. Zhou points out that telecom equipment vendors experienced a significant decline in revenue from wireless radios used in 5G networks in 2023. He believes that this downcycle is far from over, especially with a major slowdown unfolding in India after a period of rapid growth.

Global Telecom Capex

Zhou does not anticipate a recovery in global telecom capex (capital expenditures) outside of mainland China. His global telecom capex model suggests that it is likely to be subdued for the next three years at least. This presents further challenges for Nokia and Ericsson.

Long-Term Structural Risk

Zhou also highlights increased longer-term structural risk for both companies. He points out that AT&T has chosen to use Open RAN, which allows carriers to mix and match equipment from multiple vendors, avoiding lock-in. This decision puts Nokia and Ericsson at a disadvantage.

Stocks Not Appealing

Zhou concludes his research note by stating that he does not consider the stocks of Nokia and Ericsson to be cheap. He believes that there are clear downsides to consensus estimates and forecasts EPS (earnings per share) for 2024 and 2025 that are 10-20% below consensus. With low-teens P/E (price-to-earnings) multiples and poor growth history, tough end markets, and increased risks to future sustainable growth, Zhou suggests that investors' capital would be better deployed elsewhere in the sector.