Nokia and Ericsson shares tumble on profit warning, lackluster results driven by weak U.S. markets

By Barbara Kollmeyer

Shares of Nokia Oyj and Ericsson AB tumbled on Friday after the mobile device and network equipment rivals dropped a warning and some lackluster results on investors amid struggles with weak North American markets.

Nokia (NOKIA.HE) and Ericsson stock tumbled 9.4% and 8.8%, respectively, in in their respective Finnish and Swedish markets, as early trading in U.S.-listed shares tracked those steep drops.

Ahead of its July 20, second-quarter results, Nokia cut its full-year sales guidance to EUR23.2 billion to EUR24.6 billion ($26.05 billion-$27.62 billion) from EUR24.6 billion to EUR26.2 billion previously, and trimmed its operating margin range to 11.5% to 13% from 11.5% to 14% prior.

Nokia reported preliminary net sales of around EUR5.7 billion and an operating margin of around 11%.

"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," said Nokia.

Meanwhile, Ericsson reported a second-quarter net loss of 686 million Swedish kronor ($67.2 million), which was lower than expected, and marginally better than forecast sales that rose 3% to SEK64.44 billion. However, the company didn't guide for much more improvement from that, as it forecast similar trends for the third quarter.

The Swedish company reported an 8% sales fall in its major networks, which included a 50% tumble in North America sales, offset partly by a strong India market.

Ericsson's earnings were weighed by SEK3.1 billion in restructuring charges for the quarter linked to redundancies -- Reuters reported earlier this year that the company would lay off thousands. In April, it was announced that Chief Financial Officer Carl Mellander would step down at the end of the first quarter of 2024.

"Ericsson's weak 3Q guidance and limited visibility coupled with peer Nokia's reduction in guidance this morning will keep pressure on the telecom equipment names," said a team of analysts at Citigroup led by Andrew Gardiner.

"U.S. demand weakness is more persistent than the companies expected, leading to negative revisions to 2023 guidance. Valuation is historically cheap, but with guidance cuts and negative estimate momentum, we see no near-term catalyst for shares," he said, adding that they were sticking to a neutral rating and SEK66 target prices. Ericsson's shares were trading at SEK54.18 on Friday.

As for Nokia's warning, Gardiner and the team said that was "directionally similar to what was seen in Ericsson's results, although "the magnitude of the change for Nokia is greater as its full-year guidance had anticipated greater improvement" in the second half.

Citi rates Nokia a buy with a EUR5 target price -- shares were changing hands at EUR3.54 on Friday -- based on recovering trends and improving margins that Gardiner said is "going to take longer than expected."

-Barbara Kollmeyer

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