Many countries around the world are rolling out 5G networks, as this technology offers higher data speeds and low latency that could enhance user experience.
According to Ericsson Mobility Report, 5G is expected to be the fastest-adopted mobile generation. This report estimates that there will be 3.5 billion 5G subscriptions, and around 60% population will be under 5G coverage by 2026.
However, this report states that the pace of 5G deployment is quicker in the U.S., China, Korea, Japan and the Gulf Cooperation Council (GCC).
Using the TipRanks stock comparison tool, let us compare two 5G equipment companies, Nokia and Ericsson, and see how Wall Street analysts feel about these stocks.
Nokia Corp. (NOK)
Nokia reorganized the company’s business into four business groups structured around its customer offerings earlier this year. The new business groups included Mobile Networks, Network Infrastructure, Cloud and Network services, and Nokia Technologies.
Yesterday, shares of Nokia were up 9.5% as the company stated that it would raise its guidance for FY21. The company said it is raising its full-year 2021 guidance due to continued strength in the second quarter. NOK expects to release its revised outlook and Q2 earnings on July 29.
Nokia previously guided for sales in the range of €20.6 billion to €21.8 billion, and an operating margin of between 7% and 10%. Additionally, the company guided for positive free cash flow along with a return on invested capital in the range of 10% to 15%.
Pekka Lundmark, President and CEO of the company, said, “We continue to expect some headwinds in the second half as we have previously highlighted but our performance in the first half provides a good foundation for the full year.”
In Q1, NOK posted revenues of €5,076 million, up 9% year-over-year on a constant currency basis. The company reported diluted earnings of €0.05 per share versus a loss of €0.02 per share in the same quarter last year. (See Nokia stock chart on TipRanks)
Following the FY21 financial guidance update, Charter Equity Research analyst Edward Snyder reiterated a Hold on the stock. According to Snyder, it is likely that the demand for the company’s equipment in the United States has remained strong after the double-digit growth in the U.S. for NOK in March.
Snyder added, “The first blocks of C-Band spectrum will begin deploying in earnest later this year although the benefit to Nokia will be somewhat offset by the loss of the large Verizon contract.”
At the end of Q1, Nokia’s rate of converting its 4G footprint into 5G, excluding China, was 90%, while including China, it was 80%. The company is targeting a 4G and 5G market share between 25% to 27% in FY21, excluding China.
Consensus among analysts on Wall Street is a Moderate Buy based on 9 Buys and 4 Holds. The average Nokia price target of $6.17 implies approximately 4.9% upside potential to current levels.
Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC)
Ericsson is a Sweden-based company whose business portfolio includes 5G Radio Access Networks (RAN), Digital Services, Internet of Things (IoT) platform-based products and solutions, and Emerging Business. The company is expected to report its Q2 results on July 16.
In May this year, ERIC announced that it would pay NOK a total settlement amount of €80 million to settle damages claim relating to a previous allegation in 2019 that Ericsson had violated the U.S. Foreign Corrupt Practices Act (FCPA).
In 2019, Ericsson reached a resolution with the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC) into allegations of corruption in five countries.
The company expects that its settlement with Nokia will impact the company’s EBIT by €80 million and its cash flow by €26 million in Q2. Ericsson expects to pay the remainder of the settlement amount in similar installments next year and in 2023, respectively, and this is likely to impact its cash flow.
ERIC added in its press release, “The settlement amount will be recorded as Other Operating Expenses under Segment Emerging Business and Other.”
In other news, Ericsson has reached a multi-year agreement with Samsung on global patent licenses, including patents relating to all cellular technologies. The cross-license agreement will cover sales of network infrastructure and handsets from January this year.
The settlement will end all patent-related legal disputes between the two companies. Including its agreement with Samsung, ERIC expects Q2 Intellectual Property Rights (IPR) licensing revenues to range between SEK 2 billion to SEK 2.5 billion. (See Ericsson stock chart on TipRanks)
In Q1, Ericsson reported sales of SEK 49.8 billion, up 10% year-over-year on a currency basis while diluted earnings per share came in at SEK 0.96, a jump of 48% year-over-year.
Following the Q1 earnings, Charter Equity Research analyst Edward Snyder reiterated a Buy on the stock. The analyst stated that management commentary at the Q1 call indicated that, “Second quarter gross margin is expected to be negatively impacted by a greater share of rollout projects in Networks, and investments into 5G core will be front-loaded in June before the majority of revenues for the product are recognized in 2H21.”
The analyst added that management indicated on the company’s Q1 earnings call that revenues in Q2 are projected to be $6.5 billion while EPS could come in at $0.17 per share.
Consensus among analysts on Wall Street is a Moderate Buy based on 3 Buys and 1 Sell. The average Ericsson price target of $21 implies approximately 58% upside potential to current levels.
Impact of Geopolitical Tensions with China on both Ericsson and Nokia
In May, Ericsson said in a company filing that there were uncertainties regarding the bilateral trading relationship between China and several countries, due to restrictions imposed on Chinese vendors in national 5G networks.
The company added that the Swedish Post and Telecommunication Authority (PTS) had taken a decision to exclude products from Chinese vendors from its 5G auction. Ericsson feared collateral damage from the weakened relationship between Sweden and China.
ERIC said in its company filing, “While Ericsson is invited to various ongoing tender processes in China, the final outcome remains uncertain and it is the company’s current assessment that the risk has increased that Ericsson will in those tenders be allocated a significantly lower market share than its current market share.”
Following the company filing, Charter Equity Research analyst Edward Snyder said in a separate research report, “Ericsson’s share in 5G equipment has increased over the last several quarters but further gains are in jeopardy given China’s significance in 5G and the likelihood it retaliates against Sweden. We believe this political conflict contributed to Nokia’s decision to re-enter China after essentially exiting the market in 2019 since it struggled to compete with other OEMs in performance and cost.”
According to Snyder, this political conflict led to NOK’s decision to re-enter China after it had exited the Chinese market in 2019, as the company had found it difficult to compete in that market on the basis of cost and performance.
The analyst also said that it would be difficult “for Huawei and ZTE to completely fill any void left by Ericsson, especially considering the ongoing semiconductor shortage and sanctions on Huawei.”
Snyder added, “We don't believe Nokia would gain everything Ericsson lost in the worst-case scenario, but it could see materially better top-line performance in CY22. The impact to margins is less clear since it depends on how aggressively Nokia prices its equipment to get Chinese contracts, but we believe headwinds from dilutive 5G contracts would at least be partially offset by greater volume.”
While analysts are cautiously optimistic about both stocks, based on the upside potential over the next 12 months, ERIC seems to be a better Buy.