A Tale of Two Stocks: Ericsson and ZTE

Peter Jarich

Peter Jarich – VP, Consumer Services and Service Provider Infrastructure

Summary Bullets:

  • Over the past year, the stock performance of ZTE and Ericsson has diverged, with ZTE’s share price up almost 60% over a year ago and Ericsson down almost 20%.
  • With Ericsson being a traditional telecom networking leader and ZTE just outside the top three players in the market, their stock performance tells a broader story about the market’s view of telecom and market concentration.

Earlier this week, Verdict posted a ‘Research Wire’ comparing the stock performance of Ericsson and ZTE over the past year. The exercise was a relatively straightforward one. Where Ericsson had traditionally been the top player in the telecom networking space for many years, ZTE has struggled to break into the top three. More recently, Ericsson has suffered from sales declines and disruptive corporate re-organizations, while ZTE has been forced to pay over $1 billion in sanctions in the U.S., as well as reportedly laying off 3,000 employees.

Against this backdrop, Ericsson’s stock drop might not be that surprising. Yet, ZTE’s share price growth and Ericsson’s up-and-down performance since the start of the year suggest a more complicated story. While it’s never easy to discern how the market prices a given company’s stock (financial performance vs. faith in management vs. faith in underlying market fundamentals), comparing the two stocks suggests a few things about the way the market views the two companies and the telecom networking market.

  • ZTE & China & 5G. It’s no secret that ZTE does the bulk of its business in China; ~58% of 2016 revenues were from China and Ericsson’s Q2 2017 year-over-year declines in China have led some to assume a market share gain for ZTE. Reliance on one market could be positioned as a weakness. In ZTE’s case, stock performance has only improved since YE 2016 numbers came out. And while 2016 results included other reasons for optimism (including a surge in profitability), the announcement of strong performance in Chinese 5G tests was followed by a mini stock surge. If strength in Chinese LTE can support success in 5G, it’s obviously good news for ZTE.
  • ZTE & Portfolio Diversification. With carrier networks, government/corporate, and consumer business units, it could be argued that ZTE is a different (more diversified) beast from Ericsson and this diversification helps to explain the different stock trajectories in the face of a difficult telecom market. The fact that ZTE’s stock enjoyed a major lift after the company resolved its U.S. sanctions case, clearing it up to do business in a market where its telecom networks prospects are limited (but its Consumer business is solid), speaks to this. Yet, the telecom vs. non-telecom dynamic might be overstated when looking at ZTE. Almost 60% of its 2016 revenues came from the Carrier business. And it’s next biggest business unit? While Consumer revenue (33% of operating revenue) was up by 3% in 2016, costs were up almost 7%, resulting in a 3% decline in operating profit.
  • (Acknowledged) Dour Telecom Outlook. While 5G investments may be on the horizon, it’s clear that telecom spending is in a period of weakness. Nokia’s Networks business reflects that. Cisco’s service provider revenues reflect that. ZTE’s meager Carrier growth in 2016 reflects that. Even Huawei’s H1 2017 revenues point to the same reality. What’s less clear is how the market views this weakness. Where Ericsson’s stock took a hit last year after announcing planned layoffs in Sweden, Q1 2017 and Q2 2017 earnings pointing to soft telecom spending didn’t impact the stock negatively. The market, it would seem, has built an expectation of telecom weakness into its models.

To be sure, none of this is much help in predicting future stock movement or even explaining exactly what happened with each stock in the past. On that front, there are fairly straightforward stories to tell. When it was obvious that Ericsson’s difficulties in the SP networking market were more than a temporary ‘blip’ and restructuring was coming, the market reacted. After plans were put in place to address structural issues, the stock slowly recovered. Likewise, where markets don’t like uncertainty, clearing up the U.S. sanctions case gave the market more confidence in ZTE’s fortunes. Decent financial performance helped to keep that confidence high. And, every quarter that Ericsson exhibits weakness? That’s potential upside for competitors like ZTE.

What’s next? Needless to say, we won’t venture to speculate on the future trajectory of either stock price. However, with telecom spending seen as staid, and product diversification at ZTE and Ericsson being limited (or of limited value), any progress with further diversification (regional or business) would be welcome – by investors as well as customers looking for signs of stability in their suppliers.

About Peter Jarich
Peter is Vice President for the Current Analysis Consumer and Infrastructure services. Peter and his analyst team monitor and evaluate activities in the markets for Consumer Services and Devices, Digital Media, Fixed Access, IP Services, Mobile Access, and Transport and Routing Infrastructure, Telecom Vendor Services, and overall coverage of the Mobile Ecosystem.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: