ERIC - Why Ericsson Has Been A Better Stock Than Nokia So Far

2023-12-06 07:00:00 ET

Summary

• AT&T awarded Ericsson with a $14 billion deal for commercial-scale Open RAN deployment, boosting Ericsson's prospects.
• Nokia faces a troubling drop in revenue after losing the contract to Ericsson, leading to potential cost cuts in its Open RAN initiative.
• Investors may consider related investments in Dell, Intel, and Corning.

Much changed in the prospects of both Ericsson ( ERIC ) and Nokia ( NOK ). When I last picked Ericsson as a better stock than Nokia , ERIC stock peaked at over $13.00. Still, Nokia shares almost doubled in its stock price during the pandemic. In the long run, though, Ericson came out ahead of Nokia. On Dec. 5, 2023, AT&T ( T ) picked Ericsson over Nokia to deploy its commercial-scale open radio access network . Nokia traded at a low not seen in three years .

Is Ericsson still a better investment holding than Nokia? Investors might as well include BlackBerry ( BB ) in the comparison. None of these three firms are attractive. They are struggling to win investor confidence. Among the three firms, ERIC and NOK offer a decent dividend that yields 4.16% and 4.74%, respectively. BlackBerry failed to pivot away from smartphones over a decade ago into another thriving business.

AT&T Awards Ericsson with a $14 Billion Deal

AT&T is spending up to $14 billion over five years to lead the U.S. in commercial-scale Open RAN deployment. The telecom giant wants to introduce innovation to the telecom industry through the building of a more robust ecosystem of network infrastructure providers and suppliers.

AT&T, whose stock traded as low as $13.43 in the summer, broke out to close at $17.22. Investors who bought AT&T for over 8.00% in yield at one point are enjoying a 28.22% gain from the 52-week low.

AT&T plans to have 70% of its wireless network traffic on Open RAN by late 2026, or within three years. When the telecom firm pivots from a closed proprietary interface to an open one, it offers several advantages. It would manage each cell site with mixed supplier hardware. Suppliers include Dell ( DELL ), Fujitsu, Intel ( INTC ), and Corning ( GLW ).

Investors who want to invest in the downstream Open RAN suppliers may consider those firms. Read below under "related investments" for a discussion on these suppliers.

5G Innovation Cycle

Skeptical investors will recall that the industry hyped 5G many years ago. Ericsson’s contract win with AT&T is a turning point for the 5G innovation cycle. It introduces an open, programmable wireless network. Customers will no longer view AT&T as a slow, out-of-date firm offering low-performance solutions. Instead, they will get technology that consumes less power. In addition, the networks are sustainable while offering higher performance.

Ericsson will expand its addressable market in open architecture. More customers would adapt to the open and programmable networks. This will advance the industry, with Ericsson gaining brand recognition.

Ericsson needs to fix its tarnished brand. U.S. authorities accused the company of withholding information about its alleged misconduct in Iraq. It agreed to a $206 million plea bargain in a bribery case .

In 2019, Ericsson admitted to accusations of bribery. It paid a $1 billion fine through a deferred prosecution agreement with the U.S. Department of Justice.

AT&T Dropped Nokia

Nokia will face a drop in revenue in the next two to three years. AT&T accounted for between 5% and 8% of Nokia’s mobile network revenue.

On its Q3/2023 conference call , Chief Executive Officer Pekka Lundmark hinted at telecom operators hesitant with their 5G investments. The CEO blamed the difficulty in introducing new applications that would take advantage of the capabilities of 5G. When analyst Francois Bouvignies asked about the impact of 6G on Open RAN, CEO Lundmark said the company would sustain research and development activities while still achieving 10% to 15% in cost cuts.

Nokia’s contract loss might pressure the firm to seek deep operational and R&D cost cuts in its Open RAN initiative.

Related Investments

Investors might consider Dell as a beneficiary of AT&T’s Open RAN investment. However, the PC supplier posted non-GAAP earnings per share of $1.88. Sales of $22.3 billion did not meet expectations of $22.9 billion.

Below, Dell has a good value grade. It scores poorly on growth.

The weak PC sales are potentially bad news for PC suppliers, including AMD ( AMD ) and Intel. Still, Intel depends more heavily on Dell. Analyst Christopher Danley estimated that Intel derives 83% of its sales from the PC and server segment .

Intel, which gained 58% YTD, has a weak value and growth score.

Corning is a compelling related investment. After falling below $30, the stock offers investors good value and profit potential. Still, the stock is in a yearlong downtrend. Investors are unwilling to hold a company with weak growth.

At a Technology, Media, and Telecom conference, Corning pointed to the need for TV unit growth, and demand for Gorilla Glass in optical, and fiber for data-intensive applications. Its customers are committed to a multiyear plan to achieve growth in those areas.

Your Takeaway

Nokia’s Q3/2023 report did not introduce volatility to its shares . Instead, losing a big contract to Ericsson did. At a three-year low, shareholders might consider still holding the stock. The selling pressure is high as panicking investors get out. Look at how AT&T and Ericsson's shares rebounded after a sharp selloff.

Three years later, Ericsson emerged as a better investment than Nokia. As it puts the bankruptcy scandal behind it, it may turn its attention to fulfilling its $14 billion contract with AT&T over the next five years.

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