Airspan and Nokia for Combined 5G Exposure (NYSE: MIMO) (NYSE: NOK)
The stock market has been in a tough spot over the past month with big names in 5G RAN (Radio Access Network) such as Nokia (NYSE: NO) losing 11.8% in value, as shown in the table below.
On the other hand, investors rewarded the little-known American game Airspan (NYSE: MIMO) which serves large telecom customers such as T-Mobile (NASDAQ:TMUS) up 1.52%.
This rise went largely unnoticed as few analysts cover Airspan compared to Nokia which is held by many in their portfolios. Moreover, with a Non-GAAP (FY3) P/E of 5.32x, compared to 8.48x for Nokia, the US company remains undervalued by more than 60% when looking at the future outlook. This shows that investors attach more value to Nokia in the long term.
Then, against the prevailing market sentiment and considering the opening of the 5G industry in a context of monetary tightening, the objective of this thesis is to show how Airspan constitutes a viable investment, mainly as a diversifier for those investing in Nokia, or on a stand-alone basis.
Several MNOs or mobile network operators, including Orange (ORAN), Vodafone (VOD), Telefonica (TEF) and Deutsche Telekom (OTCQX: DTEGY) have either adventure or are gradually converting to Open RAN (Radio Access Networks). Verizon (VZ) is targeting similar rollouts in 2023.
Now, to deploy a 4G or 5G mobile cellular network, these operators normally have no choice but to go through the proprietary solutions of the two major equipment manufacturers, Nokia and Ericsson (NASDAQ: ERIC), after the ousting of Huawei by US sanctions. Choosing a proprietary system, as opposed to an open system, means MNOs are forced to follow it for the life of the product, making it impossible for another vendor to adapt it.
It is precisely this “vendor lock-in” that the Open RAN solutions offered by Airspan attempt to break, in particular by opening up the communication protocols to a plurality of players. The company’s shareholders include big names like Qualcomm (NASDAQ:QCOM) and SoftBank (OTCPK:SFTBY) and in addition to counting MNOs among its customers, it has a presence in the FWA (fixed wireless access) and private 5G markets. , as shown below.
However, to be realistic, there is strong competition due to the massive presence of Nokia and Ericsson in the field for decades, as well as other Open RAN disruptors like Mfuture. There is also the fact that Airspan has been hit by supply chain issues, namely freight costs to a greater degree than Nokia or Ericsson, because, unlike the two European OEMs, it does not have production systems developed in different parts of the world.
Additionally, the open option has traditionally involved more partners working together, which means more diverse supply arrangements compared to Nokia’s more all-in-one approach. As a result, some customers who had already considered implementing Open RAN solutions had to delay their plans, resulting in Airspan’s radio infrastructure business being “relatively stable low growth” in second quarter of 2022 (Q2).
Airspan favored by the CHIPS law
Nevertheless, thanks to the strength of private 5G with hyperscaler orders, the company was still able to generate 11.65% revenue growth (table below) in the second quarter on an annual basis, this which is superior to Nokia. Comparing profitability, Airspan’s gross margins of 40.11% are almost identical to those of the Finnish company, although the latter enjoys a much higher revenue base on which to spread its fixed costs. This shows that the American company enjoys better production efficiency, which is explained by a differentiated product design, as well as the chips it uses, and its software-defined approach.
So, with more sales, its profitability should increase.
In addition, the rise in geopolitical tensions works in favor of Airspan, which can count on the $1.5 billion committed to the network equipment industry for Open RAN development through the CHIPS Act. The company is also well placed to benefit from £250 million from the UK government for related large-scale deployments.
Similarly, the U.S. Department of Commerce recent further limit the supply of advanced microchips to China. Now these restrictions apply to advanced AI semiconductors used for advanced computing and military applications, but broader rules could follow, and there will likely be some uncertainty as RAN equipment also uses chips. advanced processors.
While investigating the result for Nokia, I discovered that it relies on contract manufacturers in this country and was therefore also affected by the strict COVID-19 lockdowns throughout 2022.
Diversification of the offer and revenues of Nokia
However, unlike Ericsson, which has production plants in Chinathe Finnish company has diversified its component supplier base since geopolitical tensions between the United States and China began to escalate in 2016 and opened 5G base station manufacturing in India in 2018. It also has three R&D laboratories and two data centers in the United States.
Thinking out loud, a complete relocation of US supply chains or a relocation of manufacturing closer to home is unlikely to happen anytime soon. Looking in the rear view mirror, it took decades for China to become a manufacturing hub with its factories also processing hundreds of materials such as silicon and gallium which are used as raw materials in foundries.
That’s why investing in Nokia, which operates in one of the few high-tech sectors without a major US shareholder, makes sense and the company is also profitable. Thus, the Finnish equipment manufacturer reported operating profit up 11% in the second quarter compared to the same period in 2021 thanks to the reduction of costs in all areas, the abandonment of the product strategy of end to end, while giving priority to R&D.
The company is now targeting the top of its full-year 2022 net sales guidance amid growing uncertainty in global economic conditions, compounded by changing exchange rates affecting sales in emerging markets. To this end, Nokia remains well diversified shortfalls in certain regions such as India being mitigated by strong demand in North America. The company also absorbed 100 million euros in losses related to its departure from Russia.
Nokia also has a strong presence in fixed networks in the United States thanks to optical and IP Additionally, mobile remains a viable investment, as telcos are unlikely to stop expanding their footprint at the first signs of an economic downturn.
Under these circumstances, staying invested in Nokia makes sense, but given the new financial terms I elaborate below, the attractiveness of Airspan becomes clear.
Market opportunities, risks and valuations
As the Federal Reserve aggressively tightens monetary policy and supports the greenback, and central banks around the world are forced to do so within their own jurisdictions to contain inflationary pressures, the era of cheap money is coming. quickly to an end. Under these circumstances, telecom operators should continue to optimize their expenses, given that the implementation and operation of 5G is 65% more expensive than 4G, and up to 40% savings are possible using open technologies compared to more conventional methods. In this regard, Airspan refers to a $40 billion market comprised of MNOs, FWAs, and private 5G for enterprises. Assuming it is just able to channel 1% by December 2024 (Fiscal Year 3), that comes to $400 million.
Additionally, with its Open RAN costing a third of the price of Ericsson’s equipment, Airspan is expected to play a key role in Tear and replace strategy, where the intention of the US government is to get rid of the equipment that was originally installed by China ZTE. To that end, about $1.9 billion has already been approved by the FCC, which is expected to go to Airspan customers like in-flight operator Gogo (GOGO).
Therefore, the company could reach the $379.8 million estimated by analysts for the 2024 fiscal year, which would be a 55.65% year-over-year growth, as shown in the table below.
According to the same estimates, the 2024 financial year would also see a positive EPS. So going back to the forward P/E of 5.32x as I mentioned in the introduction, this translates to a stock price of $3.68 (2.3×1.6) based on the current share price of $2.3 and a 60% undervaluation to Nokia.
Investors will also note that although Airspan generates high gross margins, it is currently not operationally profitable and has been assigned an “F” rating by SA. However, it had cash of $36.3 million and receivables of $48.3 million at the end of the second quarter. Additionally, current assets are double current liabilities, and with an improved supply chain, less money is expected to be spent on expedited shipping in the second half of this year, while Cash used for operations is expected to be reduced by approximately 10% by the fourth quarter. . Additionally, the company, which has taken the SPAC route to go public in 2021, remains highly leveraged and has a OK with Fortress for debt refinancing.
Therefore, Airspan, which is also flagged as “high risk of performing poorly”, may not fit the investment goals of value investors. On the other hand, it has more of a disruptor status, suitable for being part of a portfolio with a long-term investment objective.
It also makes sense as a diversifier for those who own shares of Nokia, whose growth for fiscal year 2024, as shown in the chart above, is expected to stagnate at around 2%. In contrast, Airspan is expected to grow by 55%, which is achievable thanks to the CHIPS law and the Rip-and-Replace strategy.
Finally, shares of Airspan rose 7.3% on Thursday, October 7 when the more restrictive measures on chip exports to China were announced, which means something big could be on the way. That said, uncertainty reigns and it is better to wait for the dust to settle before investing.
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