Telecom & Wireless
5G Could Greatly Help Major Turnarounds at Nokia and Ericsson
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When it comes to the continual expansion and growth opportunities in technology, media and communications, one of the great opportunities ahead is said to be around the coming expansion into 5G. This is effectively the fifth generation of mobile networks and is the next major phase of mobile telecommunications standards, with 5G offering speeds far beyond what the current 4G systems offer consumers. 24/7 Wall St. continually looks for opportunities in growth sectors. Sometimes these come from Wall Street reports and sometimes they come from industry reports. Either way, there is always a need for added color and reference that has to be considered before blindly trusting any outside opinions.
It turns out that rivals Nokia Corp. (NYSE: NOK) and LM Ericsson (NASDAQ: ERIC) both have serious exposure to and potential upside from the coming 5G revolution. For investors who have been around these names for many years, it feels as though it has been quite some time since both Ericsson and Nokia were viewed favorably.
Ericsson already has reported earnings, and Nokia earnings are due this week. Ericsson’s American depositary shares (ADSs) have traded marginally higher in the wake of its earnings, but not so much that it would feel like any future upside has been stolen. Meanwhile, Nokia’s New York-listed shares have challenged 52-week highs. The analyst community is not universally calling for major upside in these two companies, but many firms have become much more positive on the 5G opportunity ahead in the wake of Chinese suppliers Huawei and ZTE being excluded from many 5G markets where they might have had a shot at winning business.
Before getting into stock calls from Wall Street, note that there are some important figures and projections to consider about the upcoming 5G opportunity in the coming years. A late-2018 report from International Data Corporation (IDC) forecast that the total 5G and 5G-related network infrastructure market would grow from approximately $528 million in 2018 all the way up to $26 billion in 2022. With a compounded growth rate of over 100%, IDC also said that it sees the 5G RAN segment to be the largest market sub-segment during that time. And for some balance without the upside hype, Wired.com wrote after a Verizon presentation at the 2019 Consumer Electronics Show to wait a year before the real 5G is around.
It is important to consider that the analyst calls below do not necessarily concern just the post-earnings news for Ericsson, and they are in no way meant to predict that the upcoming Nokia earnings report will send the shares higher. Still, several reports are touting an overlapping opportunity for both companies and their long-standing roads to recovery. Both of these ADSs have also traded under $10 apiece for too many years to easily count.
The aim here is to look beyond the earnings from 2018 and to focus on the 5G opportunities of these companies out into late-2019 through 2022. Of course, it goes without saying that any continued global economic slowdown may harm certain capital spending investments from major telecom and wireless carriers and the media networks.
Argus has a Buy rating and a $14 price target on Ericsson. The independent research firm pointed out that Ericsson returned to full-year top-line growth in 2018 for the first time since 2013 and that it now has a more competitive cost structure. Ericsson is now profitable on an operating profit level before restructuring costs. Also highlighted was that the Networks segment profits have strengthened to roughly three-times greater than in the fourth quarter of 2017. That firm talked up margins and its 5G exposure:
Ericsson management believes that the company is “comfortably on track” to meet its operating margin targets of 10% by 2020 and 12% by 2022, both before restructuring. On the 5G front, carrier spending is exceeding expectations as well as Ericsson’s ability to meet demand. In a sign of strong receptivity for its solutions, Ericsson appeared to gain 5G share even as it was raising prices; the CEO claimed U.S. share gains of 300 basis points. Ericsson stated that it currently lacked sufficient personnel in North America to keep up with demand from carriers including AT&T and Verizon.
CFRA (S&P Global) has only a Hold rating, but its $10 target still indicates ample upside for some investors. CFRA talked up the company’s 5G exposure by saying that the Networks sales growth has accelerated in recent quarters, signaling that the momentum in the global 5G market could be stronger than the firm’s expectations to offset the slowdown in 4G rollouts. And after Ericsson’s comments on 5G investments continuing to build momentum in North America, the firm believes this will be followed by other countries in 2019.
UBS noted after earnings that Ericsson continues to deliver after a strong 16% beat on earnings in its Networks unit. After strong earnings last week, UBS sees consensus estimates for 2019 rising, and the firm also sees its topline performance as a positive read for Nokia.
Merrill Lynch has only a Neutral rating, but the firm sees 5G and problems with Huawei and ZTE in China helping both Ericsson and Nokia. The firm’s Tal Liani said the Networks segment sales outperformed the firm’s estimates on 5G deployments in North America, Europe and Latin America. That report said:
We continue to believe Ericsson is gaining share at key customers like Verizon, Rogers, and Deutsche Telekom, and the timing of deployments is positive. Management believes its total market share has increased by almost 300bps over the last year. The share gains and stable gross margins also suggest a relatively benign pricing environment despite political pressures on Huawei/ZTE. Related to the emerging backlash versus the Chinese vendors, management is not currently seeing any related share gains and sees the security concerns adding uncertainty for carriers. We believe that growing pressure in key regions could ultimately benefit both Ericsson and Nokia.
Merrill Lynch had reiterated its Buy rating on Nokia in an earnings preview for it and Ericsson. Liani’s earnings preview on both companies before Ericsson’s report said:
We believe Nokia and Ericsson will equally benefit from these trends, with ~$5bn incremental revenue opportunity in the Bull case, and no incremental revenue in the Bear case. With similar revenue upside for both and lingering uncertainties, we continue to favor Nokia’s diversification, healthier margin structure, and lower Street expectations.
24/7 Wall St.CFRA has a Buy rating on Nokia with a $7 price target. The firm’s pre-earnings report also talked up the 5G exposure for Nokia, and equity analyst Jun Zhan said:
We see increasing momentum in the initial stage of 5G investment led by North America that offset the weakness in other regions caused by tapering of 4G investments, generating a minor beat in Nokia’s Networks business. To mitigate the impact of price erosion, Nokia is increasing its end-to-end strategy comprised of solutions, products and services. The payoff on the 5G investment could be much longer than the past given 5G’s wider spectrum deployment for the application not just for consumers but also for industrials, by our analysis. Nokia also focuses on the higher-margin licensing business to increase the contribution from recurring net sales.
Nokia’s ADSs were last seen trading up 1% at $6.56, in a 52-week range of $4.75 to $6.64 and with a consensus target price of $7.09.
Ericsson’s was trading up 1.6% at $8.89 per ADS. The consensus analyst target is $9.64, and the 52-week trading range is $6.00 to $9.45.
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