Why ERIC Stock Deserves Investor Attention
To a lot of consumers, the name “Ericsson” may seem like a thing of the past. When Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) formed a joint venture with Sony Corporation in the 2000s, they brought some very popular cell phones to the market under the “Sony Ericsson” brand. Today, making cell phones is no longer a part of Ericsson’s business, as Sony bought out Ericsson’s share in 2012. However, if you ignore ERIC stock right now, you’ll be missing out on a major opportunity.
The reason is simple: even though Ericsson is no longer selling products to consumers directly, it is a leading player in one of the fastest growing segments right now—5G.
You see, Ericsson provides information and communications technology solutions to telecommunications companies around the world. It operates through four main segments: Networks, Digital Services, Managed Services, and Emerging Business. In particular, it provides hardware, software, and services that are necessary for wireless carriers to offer 5G service to their customers.
Of course, we are still in an early stage of 5G, but Ericsson has already emerged as one of the leading players in the business. It is the first company to launch live commercial 5G networks on four continents. At the time of this writing, Ericsson is powering 61 live 5G networks in 32 countries around the world. (Source: “Ericsson 5G,” Telefonaktiebolaget LM Ericsson, last accessed September 17, 2020.)
And that is just a start, because the company has entered into 109 commercial 5G agreements or contracts with unique operators. (Source: “109 commercial 5G agreements or contracts with unique operators,” Telefonaktiebolaget LM Ericsson, last accessed September 17, 2020.)
In an investor presentation earlier this year, Ericsson said that, in the radio access network (RAN) market, it had a 52% share in North America, 32% share in Europe, the Middle East, and Africa, and 28% share in the rest of the world, excluding China. (Source: “Ericsson on 5G – A business and portfolio snapshot,” Telefonaktiebolaget LM Ericsson, last accessed September 17, 2020.)
Keep in mind that, due to geopolitical tensions, the U.S. has banned Chinese company Huawei from its 5G network business arena. And the U.K. recently did the same. Since Huawei is a major competitor to Ericsson, these decisions could be an opportunity for Ericsson to gain some market share. (Source: “UK bans Huawei from its 5G network in rapid about-face,” CNN, July 14, 2020.)
Looking at the financials, Ericsson generated 55.6 billion Swedish crowns (USD$6.3 billion) in revenue in the second quarter of 2020, representing a one percent increase year-over-year. (Source: “Second quarter report 2020,” Telefonaktiebolaget LM Ericsson, July 17, 2020.)
Considering that a lot of businesses around the world were severely impacted by the COVID-19 pandemic in the second quarter, Ericsson’s top-line growth was rather commendable. The company attributed the increase to 5G deployments in Northeast Asia.
At the same time, Ericsson achieved a gross margin, excluding restructuring charges, of 38.2% for the quarter. This marked an expansion from the 36.7% gross margin reported for the year-ago period.
Furthermore, the company’s free cash flow before mergers & acquisitions more than doubled year-over-year to 3.2 billion Swedish (USD$360.0 million) crowns in the second quarter.
Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) Stock Chart
Chart courtesy of StockCharts.com
If you’ve been following the tech sector, you’ll know that companies with strong potential have been highly sought after, especially after the market started bouncing back from the sell-off earlier this year. In fact, it wouldn’t be an exaggeration to say that the tech sector was outperforming the broader market.
To give you an idea, the tech-laden Nasdaq Composite is up more than 18% year to date, substantially outperforming the S&P 500 Index, which returned around two percent during the same period.
And that means if you are looking to get into the tech sector right now—especially tech companies with major growth catalysts like 5G—chances are you will be buying stocks after they’ve shot through the roof.
In the case of Telefonaktiebolaget LM Ericsson, the company’s shares also got more investor attention this year. But if you look further back (see the chart above), you’d see that ERIC stock is basically trading at similar levels to where it was six years ago. With one of the most entrenched positions in the 5G industry, Ericsson could deliver some serious returns in the years ahead.