'Downcycle not over.' Nokia, Ericsson shares tumble after downgrades at Barclays.

By Barbara Kollmeyer

Investors should pass on shares of Ericsson and Nokia, say Barclays analysts who downgraded both telecom equipment providers, citing unappealing valuations and struggling radio access networks (RAN).

The pair were dropped to underweight from neutral, with price targets lowered 15% and 35%, respectively. Shares of Ericsson (ERIC) (SE:ERIC.B) fell over 3% and Nokia (NOK) (FI:NOKIA) dropped more than 2% locally, with those losses reflected in U.S-listed shares ahead of the market's open.

"Telecom equipment vendors saw their North American RAN revenue almost halve last year. We believe this downcycle is not over with 5G base station data suggesting a major slowdown in India," said a team of analysts led by Joseph Zhou.

The analysts zeroed in on AT&T's (T) decision last year to choose Sweden's Ericsson over its Finnish rival in a deal to buy up to $14 billion of Open RAN technology. Nokia has said its revenue from the U.S. telecoms giant would take a hit from the five-year deal.

Under traditional RAN systems, which are needed to connect devices to networks, mobile operators buy hardware and software from a single vendor. Open RAN technology lets them build those networks with equipment from various suppliers. And the risk from the latter for big vendors has increased with the AT&T deal, said Barclays analysts.

"Should AT&T succeed in achieving vendor diversification (albeit not a given in our view), we fear this might open the floodgates for Open RAN adoption by brownfield operators," or high-capacity network operators, said the analysts, adding that Ericsson's win may prove short-lived.

Incumbent RAN equipment vendors Ericsson and Nokia have over two-thirds of the global RAN market outside of China, they note.

The analysts said investors are also not appreciating the prospect of a slowdown in India, as they point to data suggesting 5G deployment in the country has "materially slowed following the fastest 5G rollout in history last year."

They expect Ericsson and Nokia's Indian RAN network revenue to contract by around 40%, with the possibility for a contraction of between 30% and 60% this year.

And Ericsson and Nokia investors may be waiting awhile to see any boost from a recovery in telecom capital expenditure in the rest of the world.

"Our global telecom capex model, which tracks consensus estimates for 264 quoted telecom companies outside mainland China, suggests global (ex-China) telecom capex is likely to be subdued for the next three years at least," they said.

Valuations are also unappealing for the Finnish and Swedish companies, said Zhou and the team. They see "clear downsides" to consensus estimates on the pair, noting that their own 2024 and 2025 earnings per share forecasts are 10% to 20% below that consensus.

"Both Ericsson and Nokia are trading on low-teens P/E [price/earnings] multiples on our forecasts, not appealing for companies with poor growth history, tough end markets, and increased risks to future sustainable growth," they said.

-Barbara Kollmeyer

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01-19-24 0626ET

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