A Threat To Network Giants
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Alcatel-Lucent (NYSE: ALU) recently announced that it will be releasing a line of products that it's been developing for the past three years. This new line will enter Alcatel into a new market of core routers. Alcatel's new product is a revolutionary technology and it will be the most innovative and powerful product currently in the industry. The new 7950 XRS line of routers will create a variety of opportunities for Alcatel in the near future and will most likely increase the current price in 2012 and throughout the next few years.
Alcatel's stock price is down four percent year-to-date, while decreasing by over 35 percent in the last 3 months. The turn may have started as the stock price has increased by close to five percent for the past four weeks. Sales growth is down by over 20 percent in the previous year as well as the previous quarter. Return on equity and operating margin improved at the end of 2011, but decreased by the end of Q1 in 2012.
The net margin has been decreasing for the past three quarters. Fortunately, the debt to equity ratio has been decreasing for the past three quarters as well. Price is under seven times earnings; this is less than the industry average. The price to book ratio is also significantly less than the industry average. Both the net profit margin (TTM) and return on equity are around double the industry average. Both the current ratio and quick ratio are above one. The gross margin is over 30 percent, while institutional ownership is below 15 percent.
Alcatel's been selling routers for close to a decade, but these new core routers are something different. The 7950 XRS, which is short for Extensible Routing System, will be available in three different models. This will make Alcatel a viable competitor with Cisco (NASDAQ: CSCO) and Juniper Network (NYSE: JNPR) for core modem market share. The giants together hold over 80 percent of the core router market share, while Alcatel only holds a 24 percent. Alcatel has pivoted toward Cisco by transitioning over to the core router market. Nomura research analyst Jeffrey Stuart says that Cisco is projected to see a drop of up to 10 percent in market share, while Juniper's market share could drop by 4 percent, by 2014. Unlike Cisco, which has a broader product base, Juniper will likely feel the more immediate impacts of Alcatel's push into the core router market. Service providers currently make up nearly 65 percent of Juniper's revenues.
Alcatel believes the growing demand for IP routers has network operators spending $4 billion annually. The growing market for smart phones, tablets, online voice, data and media services, as well as cloud infrastructures are all creating an increasing demand for faster data transfer speeds and capacity upgrades.
An increasing number of operators are switching from 3G to LTE networks. The 7950 core routers use 60 percent less energy than the current core routers on the market and transfer up to 32 Tbps. Operators will be able to put more data into these core routers. Verizon (NYSE: VZ) has already announced it will be the first network operator to use this new router. In order to increase efficiency and lower costs, NTT Docomo chose Alcatel to construct its IP network to support increasing demand in its Japanese market. Routers currently provide 60 percent of the revenue in Alcatel's network division. Alcatel projects a six percent increase in income annually for the next five years.
There are a number of factors indicating that this new core modem will have a significant impact on Alcatel's earnings as well as the tech and communications industries as a whole. There were nearly 300 million smartphone shipments around the world in 2010. Additionally, Gartner expects this number of tablets to increase to 665 million by the end of 2016. LTE networks are becoming the norm as commercial LTE services are currently an option in over 35 countries. According to Ericsson (ERIC), by the year 2017, around 85 percent of the world will access the internet through 3G networks and there will be close to nine billion mobile subscribers on the planet. Alcatel-Lucent is a leader of global expertise in tech services as it maintains a presence in over 130 countries around the world.
Releasing this new router is great timing by Alcatel. HD video and broadband services are becoming more of the norm along with cloud services. All of these advanced technologies create larger demands from end-users on data and internet providers. There are a number of opportunities around the world for Alcatel to grow and implement its new products and technical services. Alcatel has also recently agreed on a contract with Bharti Airtell. Bharti Airtell is an Indian telecommunications provider that services close to 20 emerging markets in Asia and Africa. This is a contract to build an IP network and will open up new markets around the world for Alcatel. America Movil recently chose Alcatel to help with the establishment of a 4G infrastructure in Latin America. Alcatel will also work with West Central wireless to launch 4G LTE services in the state of Texas.
This is one of the best times for investors and current shareholders to buy additional shares in Alcatel. Once the new modems are released and these global projects become more prominent, sentiment in the markets for Alcatel will improve. The next earnings report also has significant potential to improve the current stock price. This current price per share is extremely advantageous for investors looking for a short-term or long-term substantial return in the tech industry.
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