Continuing on through the 'Evergreen' list a quasi-duopoly, they're ostensibly at the center of the connectivity wave we're currently all riding.
The first thing that comes to mind are the fairly long and expensive R&D cycles; also, there are other competitors - from those kept in a box by geopolitics to niches, etc. If there is one area that is ripe for disruption, as technology self democratizes, this may be it.
Consider the margins they've already ceded to those around them (they play in the middle); either your margins remain so anemic as to not draw attention from others and your customers or...
The current generation, 5G and its ilk, brought on a technological shift that required a lot of nodes; I'm probably using the incorrect terminology but as I understand it - the higher frequencies necessitated such.
That it was and is an expensive deployment for the major telecoms is something to keep in mind; surely, they would like a less painful cycle next time.
Anyways, whichever way '6G' breaks (and I've got no idea what they're toying with) you've got the likes of a very large Apple on one side - which might want to disrupt the telecoms at some point in any case! Then you've got the telecoms which are larger and more entrenched than ever! And just to cap things off, technology has the ability to be both a force of centralization and decentralization - with the latter likely quite the threat to the current business model!
This is all too philosophical, how are they doing in the current 5G wave where they're supposed to be reaping what was sown?
Nokia - expectations are for them to shrink roughly 10% over 2024-2026, though I do believe there have been divestitures of late. You also need to take care as the numbers can be lumpy due to the IP licensing; I should probably do some rolling averages for them.
Where expectations explain the multiples versus history is when we look down the stack, which is to say, a smaller and more efficient company. People are modeling for greater shareholder value/ returns here. Will need to check if management has a credible plan there.
Relative to their own history things are elevated though I'd say justified by various metrics; in absolute terms (relative to others and just generally what I'm willing to pay) they are quite cheap - at levels that could attract private equity, etc..
Ericsson - expectations are similar to those of Nokia with the topline flat but substantial improvement throughout the margin stack.
Ericsson is trading at a slight premium to Nokia and their various metrics seem to be lagging. Best I can recall they've had quite a few scandals and I did not like that last large acquisition.
Both management teams I'm highly skeptical of, though I do like that Ericsson has Investor AB (the Wallenbergs) behind them.
The natural push-pull between squeezing out gains from the last R&D cycle while not losing an edge on the next; that's an important factor to balance. Both have clean capital structures, and I'll have to look at their capital allocation plans. What little I recall about 6G is that we're talking 2030s - there could be an edge in determining the durability of the cash generative cycle. That said, there's always the risk that management gets bored and does something silly during this lull.
With about ten seconds of 'googling' (which by the way is more painful than ever - they're self-disrupting) I land upon Nokia's 6G page, about as fluffy as the text above:
Using Bing to find the equivalent for Ericsson (as I've swapped to Edge and Bing on the computer over a year ago) et voila:
Taking a step back, thinking about the capital cycle; look at the defense contractors, they're doing great because they've been able to leverage historical R&D and increase utilizations dramatically.
As we're so far out from 6G you have to wonder if there is a similar opportunity here.
Sure, the majors just went through a painful upgrade cycle, but could there be more? On the other side, you have to wonder if things could be disrupted sooner - could the end devices flip things on their head (as they become more powerful - and local = efficiency)?
Keep circling back to these fluffy philosophical musings, which tells me that you really need to lean on the management teams here.
Last thought for now before some sort of conclusion, as we've been in a protracted industrial slump, the tide of globalization has been ebbing, and labor has renewed power.. Do these two or similar ilk (IoTs - Internet of Things) stand to reap outsized benefits? Could these two be cheap ways to play a larger reshoring effort than is currently expected? Of course you need to ask if that is already baked in and if management is prepared for such..
Typically, I like to frame things in a three-part argument, setup-conflict-resolution, as you can see from the above - I am all over the place. Which tells me I need to dig in, these two are moving up the work pile.
Conclusion = Invest and Investigate
br. -john
p.s. ballparked my saying no from the outset at 75-25, guess you can always surprise yourself
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