Shares of Nokia Oyj and Ericsson AB experienced significant drops on Friday following warnings and lackluster results, as they struggle with weak North American markets.
Nokia NOK, +1.64% NOKIA, -9.12% and Ericsson ERIC.A, -6.83% ERIC.B, -7.70% stocks plummeted 9.4% and 8.8% respectively in their respective Finnish and Swedish markets. This drop was mirrored in the early trading of U.S.-listed shares.
In anticipation of its second-quarter results on July 20, Nokia revised its full-year sales guidance. The new range is set at €23.2 billion to €24.6 billion ($26.05 billion-$27.62 billion), down from the previous range of €24.6 billion to €26.2 billion. Additionally, Nokia adjusted its operating margin range to 11.5% to 13% from 11.5% to 14% prior.
Preliminary net sales for Nokia came in at around €5.7 billion, with an operating margin of approximately 11%.
According to Nokia, “Customer spending plans are increasingly impacted by high inflation and rising interest rates along with some projects now slipping to 2024–notably in North America.”
On the other hand, Ericsson reported a second-quarter net loss of 686 million Swedish kronor ($67.2 million), which was lower than expected. However, the company displayed a marginal improvement in sales with a 3% rise to SEK64.44 billion, meeting expectations. Ericsson does not anticipate significant improvement in the third quarter, as it expects similar trends to continue.
Ericsson experienced an 8% decline in sales in major networks, including a significant decrease of 50% in North America sales. This loss was partially offset by a strong market in India.
Ericsson’s Restructuring Impacts Q3 Earnings
Ericsson, a leading telecom equipment company, reported SEK3.1 billion in restructuring charges for the quarter. This can be attributed to the company’s decision to lay off thousands of employees. The announcement of Chief Financial Officer Carl Mellander’s departure at the end of Q1 2024 added to the company’s challenges.
Pressure on Telecom Equipment Names
Analysts at Citigroup, led by Andrew Gardiner, highlighted Ericsson’s weak Q3 guidance and limited visibility. They also mentioned Nokia’s reduction in guidance, which further intensified the pressure on telecom equipment companies. Negative revisions to 2023 guidance resulted from persistently weak U.S. demand, leading to a cautious outlook.
Neutral Rating for Ericsson
Despite the challenges, Citigroup maintained a neutral rating for Ericsson, along with a SEK66 target price. The analysts acknowledged Ericsson’s historically cheap valuation but expressed concern about the lack of near-term catalysts due to guidance cuts and negative estimate momentum. Ericsson’s shares were trading at SEK54.18 on Friday.
Nokia’s Warning Mirrors Ericsson’s Results
Regarding Nokia, Gardiner and the team noted that the warning was directionally similar to Ericsson’s results. However, they highlighted that the magnitude of the change for Nokia was greater as its full-year guidance had expected more significant improvement in the second half.
Recovering Trends for Nokia
Citi rates Nokia as a buy with a €5 target price. Nokia’s shares were priced at €3.54 on Friday. The analysts believe that recovering trends and improving margins will contribute to Nokia’s long-term success, although it may take longer than initially anticipated.
