David Ramos
Nokia stock (NYSE:NOK) fell to its lowest point in 3.5 years, and Ericsson (NASDAQ:ERIC) gained 5.5% to reach a six-month high, after Ericsson beat its telecom-equipment rival to a $14B contract to revamp the wireless network at AT&T (NYSE:T).
Nokia (NOK) had dropped 4.3% on the NYSE at midday Tuesday, while AT&T (T) was the top big gainer in Communication Services, up 2.8%.
Ericsson (ERIC) was already responsible for about two-thirds of AT&T’s U.S. network gear, and the deal will see its equipment replacing that remaining from Nokia in a network moving to open-source standard Open RAN [Radio Access Network].
That move to an open standard also means potential gains with the entry of multiple other suppliers for the network, including Corning (GLW), Dell Technologies (DELL), Fujitsu (OTCPK:FJTSY) and Intel (INTC).
The deal is a “major blow” to Nokia, which had already lost similar longstanding customer Verizon (VZ) three years ago, BofA noted.
“Clearly the transition to Open RAN appears to have been the main culprit behind AT&T’s decision,” analyst Didier Scemama wrote. AT&T had accounted for some 5-8% of year-to-date revenues in Mobile Networks for Nokia, and the Finnish provider expects the news will delay its progress toward double-digit operating margins by up to two years.
As for Ericsson, it means a near-4% increase in incremental annual revenues — and at least a short-term revenue boost, but some uncertainty around longer-run Open RAN margins as those commodity suppliers join the fray. Scemama has maintained an Underperform rating on Ericsson.
J.P. Morgan agrees that Ericsson (ERIC) might not gain substantial revenue scale given the entry of the new suppliers, but that it should at least keep scale. It is a “major issue” for Nokia (NOK), though, as “this business will be lost.”
Needham, long a skeptic of the Open RAN standard, suggests the 5G market looks too small to support both traditional and next-generation approaches. “ERIC has been by far the biggest detractor to O-RAN since its inception, so this deal appears an effort to keep its strategic RAN supplier afloat after its dismal 2023 results to date,” analyst Ryan Koontz wrote.
