The telecommunications industry supply chain is experiencing a significant downturn as Nokia and Ericsson recently issued pessimistic forecasts regarding carrier spending, particularly in the United States.
Nokia’s Sales Outlook Cut Amidst Weakening Demand
Nokia (ticker: NOK) has slashed its sales outlook, attributing it to deteriorating demand in the second half of the year. The decline is a result of both the macroeconomic environment and customers’ inventory digestion. It was further revealed that customer spending plans are being increasingly influenced by high inflation, rising interest rates, and delays in certain projects, notably in North America where these setbacks are pushing some projects to 2024.
Ericsson Glimmers of Hope for 2023 Recovery
In comparison, Ericsson (ERIC) expressed a more cautiously optimistic stance. Their guidance, however, fell short of expectations, disappointing investors. CEO Borje Ekholm stated that the company anticipates a gradual market recovery beginning in late 2023 and further improvement in 2024.
The Impact on the Market
These reports have resulted in widespread selling of networking equipment stocks, chip providers, and other companies heavily reliant on business from AT&T (T), Verizon (VZ), and T-Mobile (TMUS), which dominate the U.S. telecommunications sector.
According to Citi analyst Andrew Gardiner, “The telecom equipment market is facing stronger headwinds than we anticipated, particularly in the key U.S. market, where inventory digestion and weaker deployments are creating greater pressure on near-term revenue.” Gardiner further noted that with both Ericsson and Nokia lowering their outlooks, any hope for a fundamental recovery appears to be postponed until 2024.
Implications for Chip Makers
Wells Fargo analyst Gary Mobley highlighted key implications for chip makers Analog Devices (ADI) and Marvell Technology (MRVL). Both Nokia and Ericsson are customers of these chip makers, with wireless communications accounting for about 8% of ADI’s total revenue and wireless base stations contributing approximately 10% of Marvell’s revenue.
In conclusion, the telecommunications industry is facing turbulent times as Nokia and Ericsson’s warnings have triggered a negative impact on the market. The road to recovery seems to be delayed until 2024, leaving businesses and investors with uncertainties in the years ahead.
Weaker Demand for Network Equipment Impacts Nokia and Ericsson
Evercore ISI analyst Amit Daryanani suggests that the challenges faced by Nokia and Ericsson indicate a decline in demand for radio address network (RAN) equipment. While CommScope (COMM) has some exposure to this market, network equipment providers Cisco Systems (CSCO) and Juniper Networks (JNPR) have limited exposure. Daryanani notes that Ericsson and Nokia’s recent statements are potentially positive for Ciena (CIEN), as it has no RAN exposure but benefits from network growth in India, an area of strength according to Ericsson.
Meanwhile, UBS analyst Joshua Spector downgrades specialty glassmaker Corning (GLW) from Buy to Neutral. Spector predicts that it will take a year or two for Corning to achieve improved growth in its optical fiber business, primarily serving the telecom sector. He adjusts estimates for Corning to account for a slower recovery in customer demand from both the flat-panel display and smartphone businesses.
As a result of these developments, Ericsson shares fell 10.5%, while Nokia experienced a 9.3% drop.
Other communications equipment players were also impacted, with CommScope down 10.5% and Ciena down 6%. The selling extended to networking infrastructure providers such as Cisco (-2%), Juniper (-5%), Arista Networks (ANET, -2%), and Extreme Networks (EXTR, -3%).
The slide also affected niche telecom infrastructure providers like Lumentum (LITE, -7%), Infinera (INFN, -4%), and Viavi Solutions (VIAV, -3%).
Among comms-related chip companies, Analog Devices and Marvell both declined by 2%. Corning shares saw a 6% decrease.
Telecom shares were not spared, with AT&T down 5%, while Verizon and T-Mobile saw a 1% decline. Dish Network (DISH) experienced a 5% decrease, while cable providers Comcast (CMCSA) and Charter Communications (CHTR) were both 1% lower.
Leave a Reply