Wall Street analysts are homing in on a surge in wireless spending.
The big wireless telcos have been seeing solid subscriber growth, swinging to positive cash flow and realizing their networks need upgrades. Now a number of analysts are predicting those factors will lift industrywide capital spending in 2004, giving a further boost to the networking companies that already have enjoyed a strong start to the New Year.
"Spending worldwide should be up 6% and maybe even more in the U.S.," says Sanford Bernstein analyst Paul Sagawa. Lehman Brothers analysts were also optimistic Tuesday, issuing a research report calling for 7% growth in so-called capex.
The return to bullishness among these analysts heralds a presumed end to three years of steep spending cuts. It was this sharp pullback that led to the near collapse in recent years of the-cell phone infrastructure market. The growth predictions also follow last week's rally in wireless equipment names such as
Though Nokia and Ericsson have retreated slightly from last week's advance, the stocks are still up 23% and 25% respectively this year. Meanwhile, Nortel and Lucent shares continue their rise: Nortel is now up 54% and Lucent 39% this year.
The gang at Lehman Brothers says new number-portability rules, wider use of message- and photo-swapping services and a need to address poor network-service quality will prod telcos to pull out their checkbooks and buy new gear this year.
During the last big tech-sector runup, in 1999 and 2000, observers confidently predicted an industrywide spending binge on a big buildout of so-called third generation, or 3G, services such as wireless Internet access. But that much-ballyhooed trend came to naught as whopping debts and funding shortfalls curbed equipment demand. Over the last year, though, the wireless service business has been improving, leaving network operators in a much stronger position, says Bernstein's Sagawa.
"There's not a major wireless carrier today that isn't generating positive cash flow," says Sagawa. "This is a rather unnatural state for them." Indeed, these companies have typically pitched investors on their fast growth and steady geographic expansion -- at the cost of heavy cash burn.
"The reality is, if they don't spend, they can't compete," says Sagawa.
The big beneficiaries of this potential spending boomlet are likely to be the four or five key players, analysts say. The big five in wireless-networking gear are Nokia, Ericsson, Nortel, Lucent and
Notably on that front Tuesday, Motorola was awarded a $510 million contract to supply gear to
, China's largest cell-phone service. Its shares rose 2% in spite of a broader market selloff.
But the China Mobile deal came in at a smaller number than expected, says Sagawa, who has a buy on Nokia, Ericsson, Lucent and Nortel and a sell rating on Motorola. "Despite the China deal, Motorola is really the odd man out," he says.
Analysts and investors say Motorola has a more uncertain future until a number of operational issues get worked out.
Motorola's new chief, Ed Zander, is reviewing the company's various businesses and is expected soon to present a
work plan for the sputtering wireless giant.