RealMoney by TheStreet.com
It's Too Soon for a Mobile Infra Bottom
Wednesday April 30, 9:42 am ET
ByTero Kuittinen, RealMoney.com Contributor
Last week, Ericsson delivered a notable positive surprise; this morning, Alcatel-Lucent managed to disappoint yet again. ALU delivered a good old Pat Russo special -- a revenue miss, a company-specific revenue warning and a downgrade of sector prospects for 2008.
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Ericsson and ALU -- these mobile infrastructure titans have led the telecom bounce of last month. It's a fascinating phenomenon that may represent a blunt attempt to replay the last telecom cycle bottom. Re-enacting the patterns of the past is a tricky endeavor, though -- this spring run-up looks premature.
Last Time Around
Back in the summer of 2002, it was hard to think of more widely loathed companies than mobile network equipment vendors. Nobody even considered touching Ericsson or Lucent after they had seemed like the safest of telecom plays in the summer of 2000 and then turned into serial warners of nearly biblical proportions.
Yet that was the point when the worm turned -- when nobody was watching. Ericsson and Alcatel-Lucent began stunning stealth runs during the second half of 2002. Their share prices more than tripled in less than two years. In sharp contrast, some leading mobile handset names -- notably Nokia -- did not bottom until much later.
Same Players, Different Set
So there is a very good reason investors are aggressively trying to pick a telecom cycle bottom by targeting Ericsson and ALU -- they are trying to recreate the spirit of the autumn of 2002. The problem here is that markets often make an early mistake when they try to retrace an old cycle. ALU's recent bounce from $5.07 in early March to over $7 after Ericsson's first-quarter surprise shows how hungry Wall Street is to recreate a big ol' V bottom in mobile infra.
But this time around, we have not even begun to see true handset market weakness. Back in 2002, the handset industry was reeling from a huge negative surprise of the volume decline of 2001. This time around, the first quarter this year still delivered double-digit phone volume growth. Back in 2002, the S&P had corrected violently; this time around, it's within striking distance of recent highs.
In a classic case of reliving the recent past, trigger-happy Wall Street has convinced itself that the U.S. recession is going to be a shallow six-month thing eerily like the 2001 dip. Telecom investors have gone further -- they have begun fantasizing that the handset sector might not need to have any real slowdown at all, while the network sector dip might be just about done by the end of 2008.
Needless to say, this looks like wishful thinking. The mobile infra business is notoriously lumpy. Ericsson enjoyed a deliciously meaty chunk of North American mobile equipment sales concentrated in the first quarter; Alcatel-Lucent did not. Using the one-quarter regional spike in Ericsson sales as a foundation, investors have built a castle in the sky, essentially calling a bottom in the mobile infra sector.
I don't think we're in the autumn of 2002 just yet. |
