Barclays analysts have downgraded both Ericsson and Nokia, two major telecom equipment providers, citing unappealing valuations and struggling radio access networks (RAN).
Rating downgraded, price targets lowered
Ericsson and Nokia have been dropped to underweight from neutral, with price targets lowered by 15% and 35% respectively. This news has caused shares of Ericsson to fall over 3% and Nokia to drop more than 2%.
Concerns over RAN revenue and 5G base station data
"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.
AT&T deal highlights risk for traditional RAN systems
The analysts focused on AT&T's decision last year to choose Ericsson over Nokia in a deal to buy up to $14 billion of Open RAN technology. Nokia has stated that its revenue from AT&T would be negatively impacted by this five-year deal.
Under traditional RAN systems, mobile operators buy hardware and software from a single vendor. However, Open RAN technology allows operators to build networks with equipment from various suppliers. The risk for big vendors has increased with the AT&T deal, according to 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, warned the analysts, adding that Ericsson's win may prove short-lived.
The Dominance of Ericsson and Nokia in the RAN Market
According to industry analysts, Ericsson and Nokia, two prominent players in the RAN (Radio Access Network) equipment sector, currently hold a significant share of over two-thirds in the global market, excluding China.
However, the analysts also highlight some concerning factors for investors. One of these factors is the apparent slowdown in 5G deployment in India, which has followed an unprecedentedly fast rollout last year. Data suggests that the deployment has significantly decelerated, leading to expectations of a contraction in Indian RAN network revenue for Ericsson and Nokia by around 40%. Furthermore, there is a possibility that the contraction may range between 30% and 60% throughout this year.
Unfortunately, the prospects of a recovery in telecom capital expenditure worldwide may not offer immediate relief to Ericsson and Nokia investors. The global telecom capex model, which monitors consensus estimates for 264 quoted telecom companies worldwide, excluding mainland China, indicates subdued global telecom capex for at least the next three years.
Adding to the concerns are the valuations of both Finnish and Swedish companies. Zhou and the team state that consensus estimates on Ericsson and Nokia have clear downsides. In fact, their own forecasts for earnings per share in 2024 and 2025 are significantly lower, ranging between 10% and 20% below consensus.
The current low-teens P/E (price/earnings) multiples at which Ericsson and Nokia are trading do not make them attractive investments, especially considering their poor growth history, challenging end markets, and increased risks to future sustainable growth, as noted by Zhou and the team.
In summary, while Ericsson and Nokia continue to dominate the RAN market globally, it is crucial for investors to consider the slowdown in India, the subdued global telecom capex, and the unattractive valuations before making investment decisions on these companies.
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