Things certainly don't look good for Alcatel-Lucent (UNKNOWN:ALU.DL). The wireless equipment maker lost two-thirds of its value since hitting a relative high back in February as the case for telecoms continuing to build out their networks to support smartphones and video transmissions faltered.
Hanging by a wire
The financial woes in Europe withered equipment investments, and China's slowing economy undermined the ability of Alcatel to expand, with its GSM business dropping 90% in the first quarter. The second quarter was hardly any better, as China recorded another 21% drop, though Japan remained a bright spot, as did Australia . The worsening situation was felt all across the space.
JDS Uniphase (NASDAQ:VIAV) and Juniper Networks (NYSE:JNPR) lost more than 40% of their market cap at one point, while even industry leader Cisco (NASDAQ:CSCO) was saw its shares tumble 30%. Yet where Alcatel has continued sliding lower, its rivals have all bounced higher (though they've given back some of their gains in recent weeks).
The tough results notwithstanding, the outlook for network equipment makers remains positive. According to the industry watchers at TheInfoPro, spending on network technology remains a priority with core routing and switch upgrades topping the list, followed by wireless rollouts and a technology refresh .
Thus far Alcatel hasn't managed expectations any better than it's managed its results, but the industry trends should give investors hope.
Big ideas in a small space
According to Cisco, mobile-data traffic growth doubled for the fourth year in a row last year, with smartphone usage tripling even though basic handsets still account for 88% of the devices on the market. But smartphones represent 82% of total handset traffic, meaning mobile-data traffic will increase 18-fold by 2016. As 4G networks multiply, it will represent more than one-third of all traffic, with smartphones alone generating a 17-fold increase in traffic.
The expansion of 4G long-term evolution solutions means small-cell technology will be best able to help carriers manage the heavy load being placed on the industry's infrastructure. And Alcatel-Lucent is uniquely positioned to capitalize on it. It already owns 20% of the LTE market, but it also holds dozens of key femtocell deployment agreements, allowing its technology to be deployed on telephone poles, the sides of buildings, and anyplace where it's otherwise difficult for tower coverage to reach.
However, the risk is that it doesn't survive long enough to complete its mission. After recording its first quarterly loss in more than a year last time out, Alcatel initiated a round of cost-cutting initiatives to save money. As part of a plan to save $1.6 billion by the end of next year, it's slashing its workforce by 5,000 employees, cutting back in the executive suite, and restructuring its operations.
Japan to the rescue
Still, Alcatel's going to need the telcos to increase their capex programs if it wants to make good on its promises. With Verizon (NYSE:VZ) reducing spending for the time being (though still more than expected), it's going to have to rely upon Sprint (NYSE:S) to pick up the slack. Certainly the carrier has expressed a willingness to do so, particularly after picking up the iPhone, but its own precarious financial situation has left the prospects doubtful. What may be the saving grace here is the huge investment Japan's Softbank is rumored to be negotiating with Sprint (the amount is speculated to be as high as $19 billion) .
Sure, with Sprint having guaranteed to Apple it would sell $15 billion worth of iPhones, the cash could go a long way to paying for it should they fall short of the goal, but more likely the money will be used in upgrading its network. Alcatel is one of the primary vendors for the telecom's new network and will use Alcatel's new lightRadio Wi-Fi gear, enabling customers to seamlessly switch between cellular and Wi-Fi. Key to that will be Alcatel's small-cell technology.
At 12 times earnings estimates, Alcatel isn't offering much of a discount to many of its rivals, but that just speaks to the depressed nature of the industry. Considering it also trades for a minuscule fraction of its sales, and with the small-cell space set to boom, I believe Alcatel will reap large rewards for its investors (including me).
Scarcity of opportunity
I've also rated Alcatel to outperform the broad market averages on Motley Fool CAPS, the 180,000-member investment community that translates informed opinion into stock ratings of one to five stars. Admittedly Alcatel's lowly one-star rating bespeaks to the woeful performance it's already recorded, but my bullish CAPScall also serves to hold me accountable for the opinions I express here. You can let me know in the comments box below whether you disagree that Alcatel-Lucent can dig its way out of the very deep hole it's found itself in.
Rich Duprey owns shares of Alcatel-Lucent and Cisco but has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.