Alcatel-Lucent's Cloud Aspirations Help Stock

| About: Nokia Corporation (NOK)

Alcatel-Lucent (ALU) is near its 52 week high in November 2013, which is a huge increase from where the stock opened the year. Even though the company is still dealing with operating losses and falling revenue, it expects to be profitable within the next two years. The telecom developer is working on cutting costs by about $400 million this year. About 25 percent of its spending is on research and development. Part of the company's renewed optimism is based on a shift in focus from telecom hardware and services to high-performance networks, the cloud and ultra-broadband.

Financial Strategy

The company's financial strategy is to cut 15,000 jobs before 2015 and sell off over $1 billion in assets. Alcatel-Lucent also wants to create 5,000 new positions related to its new direction and become profitable by 2015. The company hopes that its Virtual Services Platform will take market share from Cisco (NASDAQ:CSCO). In early November CEO Michel Combes announced a "last ditch" effort to save the company as it will raise $2 billion from both shareholders and a high-yield bond to help reduce debt. The announcement only generated mild pressure on the stock, which has been otherwise resilient.

One of the big new contracts for the company in November was announced by China Mobile (NYSE:CHL), which will support its 4G LTE Network with the all-IP Evolved Packet Core developed by Alcatel-Lucent. This is a significant contract since the 4G LTE Network is the world's largest ultra broadband network. China Mobile had a pre-existing contract with Alcatel-Lucent to install 200,000 base stations by the end of 2013. The new contract represents an increase from 11 to 24 percent installation of China Mobile's new LTE network. This contract is part of Alcatel-Lucent's Shift Plan to focus on being the top provider of IP Networking and Ultra-Broadband Access.

In July 2013 the stock doubled from January to $2 and since then has doubled again to $4. Even though called the stock's rise a "dead cat bounce," the stock has continued to move up in November, nullifying that analysis. Speculation about Nokia (NYSE:NOK) acquiring one or more of Alcatel-Lucent's divisions is dead as Nokia has decided on other options, according to the Wall Street Journal, although there was no comment from the two companies, which some investors say would make a good team to compete with Ericcson (NASDAQ:ERIC) and Huawei.

A Determined Comeback

Executives at Alcatel-Lucent reassured investors in a conference on November 15 that the Shift Plan toward transforming the company into an "industrial specialist" will be the key to their turnaround. The company is determined to be a leader in the growing cloud computing space, as well as IP networking and fast broadband access as cloud and mobile services are becoming red hot issues in the tech sector. Combes told investors what worked for service providers five years ago doesn't work anymore and that the company has reached a turning point. Combes mentioned that Alcatel-Lucent customers could end up using 10 or more devices, which will increase demand for ultra-broadband, which is the company's term for fast wireless or wired internet connectivity. He emphasized that the company's future is defined by the cloud.

Mixed Analyst Opinions

Analyst Argus resumed its "hold" status for Alcatel-Lucent stock in November, saying it sees wider losses than expected for both 2013 and 2014. Argus pointed out that odds are not good that Alcatel-Lucent will achieve a normal "budget flush" in Q4. Meanwhile, data by Thomson/First Call indicates that November has produced only one "strong buy" recommendation, which is down from two last month, while seven analysts recommend "hold," two says "hold" and one says "sell." The trend is almost identical to the previous month.

Reuters reports a similar consensus with no "buys," three "outperforms," eight "holds" and one "sell." In other words, analysts do not think the stock is in trouble, they just think it has topped out for awhile after moving up 200 percent this year. Then again, it's important to note that Alcatel-Lucent has beaten analyst sales estimates most of the past year. Zacks Equity Research has maintained its neutral position on the stock as well. On November 11 the analyst reported that it was concerned about the Q2 wider loss, but improving revenue and gross margins were positives for the company. Zacks also acknowledged that the Shift Plan is on target.


Alcatel-Lucent is clearly in turnaround mode and has improved its technology over the past year. Its Shift Plan is working and attracting expanded business while the stock has soared in 2013 from $1 to $4 per share. Even though there's a general "hold" sentiment on the stock, the long term outlook seems to be positive since the company is working with the leading telecom company in China, where mobile internet is rapidly growing in demand.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.