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Why Avoid Nokia and Ericsson
Telecom firms are upgrading their network to 5G. This should benefit 5G network providers. Yet Ericsson
(ERIC) and Nokia (NOK) are in a sustained downtrend. What happened?
Nokia announced that it would exit the Russian market. The economic cost is minimal because Nokia
said it would lead to a provision in Q1 of about EUR 100 million. Russia accounted for under 2% of net
sales in 2021. Markets reacted negatively to the news because Nokia will give up the market. It will let
China's Huawei and ZTE have a monopoly in Russia.
Sentiment for Nokia may improve. Once that happens, NOK stock could rebound.
Ericsson is a less likely rebound candidate. The company warned of a possible fine. The U.S. accused it of
making payments to a terror group, ISIS, in Iraq.
In the first quarter, Ericsson posted operating profits of 4.8 billion Swedish kronor. It missed analyst
expectations. The company's product mix is low on software, which will hurt its profitability.
Furthermore, renewals are slower than Ericsson expected. This headwind creates significant
uncertainties in its growth potential. Investors are already avoiding slow-growing firms. Ericsson's weak
quarterly results will scare investors away.
Tech firms in the hardware space face increasing margin compression risks. Without a lift in software
sales, Ericsson is the least attractive investment at this time.
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