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How 5G is changing the fate of Ericsson (NASDAQ: ERIC)

by Greg Sondergaard
November 28, 2020
in Best Stocks to Buy Now
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How 5G is changing the fate of Ericsson (NASDAQ: ERIC)

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Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC), commonly called Ericsson, is engaged in developing and marketing information and communications technology solutions to customers around the world.

Investors looking to buy 5G stocks must see the tremendous opportunities Ericsson can benefit from while going forward. The company has seen significant growth across all its segments this year, marking the highest growth in more than a decade.

Ericsson stock traded mostly around $11 between mid-September to mid-October. However, the stock rose nearly 12 percent on October 21, the day Ericsson released its financial results for the third quarter.

Ericsson’s latest quarterly performance

The Sweden-based telecoms equipment beat analysts’ expectations for the third quarter, mainly due to improved operating margins and new 5G contracts that significantly contributed to the overall sales.

Ericsson reported operating profit of SEK 9 billion for the third quarter, as compared to 6.5 billion in the comparable period last year. The results also beat analysts’ average estimate of SEK 6.98 billion. Revenue for the quarter came in at SEK 57.5 billion, up 1 percent on a year-over-year basis.

Adjusted operating margin was 11.1 percent as of September 30, in line with its forecast.

Looking forward, Ericsson expects adjusted operating margin in the range of 12 to 14 percent for the next fiscal year.

Ericsson won 112 new 5G contracts in the third quarter, as compared to 99 in the prior quarter, as increasing number of telecom operators started scaling-up their 5G efforts amid increasing competition around the world in the 5G space.

The company is also benefitting from the United States diplomatic efforts to limit China-based Huawei Technologies from securing more agreements related to the deployment of 5G services.

At the same time, Ericsson managed to secure 3 big supply contracts from key operators in China. It will deliver radio equipment to those operators for setting up their 5G network.

Sweden ban on Huawei and ZTE

On the one hand, Ericsson has been a big beneficiary of 5G roll out in China, but on the other hand Sweden imposed a ban on China’s Huawei and ZTE from taking part in 5G efforts in the country, citing security concerns.  

Source: Getty Images

The Swedish Post and Telecom Authority (PTS) last month granted permission to four companies to participate in the 5G roll out efforts on certain conditions. One of the conditions stated that the 5G deployment must not include any equipment from Huawei and ZTE.

China’s foreign ministry criticized the move and said Sweden should review its decision to prevent a negative effect on Swedish firms operating in China.

Ericsson and Huawei are competing against each other in several markets. But surprisingly, Ericsson’s CEO Borje Ekholm also opposed the ban in an interview. He said the ban is hurting free competition and will create hurdles in the adoption of the next generation network.

Many other European countries have also taken similar steps to limit the role of Chinese companies working on the 5G development over security concerns. Another reason behind the move is diplomatic pressure from the U.S., which claims that Huawei could use its 5G equipment for spying purposes.

However, Huawei has frequently denied those allegations. A spokesman at the company said last month that allegations related to security threats are baseless and have no factual grounds.

Growing 5G consumer market

Ericsson recently published a report, saying the worldwide 5G consumer market could hit $31 trillion by 2030. It further stated that the communications service providers (CSPs) can grab $3.7 trillion of that total, besides making revenue of up to $131 billion from digital services alone during the decade.

Nearly 40 percent of the sales projections in the report are based on consumer spending on augmented reality, virtual reality, and cloud gaming supported by 5G networks, among many other things.

Ericsson 5G partnerships

Ericsson recent growth has mainly been driven by its partnership with enterprises and governments around the world that are linked to the 5G development in some way.

Source: Getty Images

The company has recently inked a partnership with Oman’s finance ministry for scaling-up the development of 5G in the country. According to the terms of partnership, Ericsson will offer technical support and monitor training programs in the country related to telecommunications technology. It will also assist the government in different projects related to 5G and Internet of Things (IoT)

Moreover, Ericsson secured another 5G-related contract with the leading UAE-based telecommunications operator Etisalat. The two companies announced the agreement earlier this week. According to the deal, Etisalat will deploy Ericsson’s 5G core network, as well as advance 5G radio that will help the Emirati telecom company to offer improved speed to customers on its network. The contract will also cover enhancements related to mobile broadband and fixed wireless.

Separately, Ericsson inked a five-year deal with Czech telecommunications company CETIN to roll out 5G in the Czech Republic. According to the agreement, Ericsson will supply equipment to CETIN for upgrading its existing network to the next generation ultra-fast network. The Swedish networking company will upgrade over 4,000 cellular sites falling under CETIN’s network that also cover the densely populated parts of Prague and Ostrava.

Analysts coverage

Overall, 25 research firms have set a price target for Ericsson stock. The average price target for the stock is $13.75 per share, with a high projection of $16.19 and a low projection of $10.92 per share. The average price target represents a premium of nearly 13 percent from the stock’s closing price of $12.19 in the last trading session. When it comes to recommendations, the majority of analysts have a “Buy” rating for the stock.

Ericsson has performed well this year, despite the difficult operating environment due to the pandemic. The stock has jumped nearly 39 percent on a year-to-date basis. The 52-week range of the stock is $6.15 – $12.61, while the total market value of the company is $40.641 billion.

Tags: 5GCETINChinaEricssonEtisalatHuaweiNASDAQ: ERICOmanTelefonaktiebolaget LM EricssonZTE
Greg Sondergaard

Greg Sondergaard

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