Ericsson (NASDAQ:ERIC) has been in a funk for many years. In 2000, ERIC stock peaked at more than $125/share. By 2002, ERIC stock fell to as low as $2, as investors left the telecom equipment sector for dead. In 2003, ERIC stock bounced back from its low, hitting $8 that fall.

Here we are 15 years later, and ERIC stock is again trading at $8. What went wrong for the company over the years, and can it finally chart a better course going forward? If the company’s past two earnings reports are any guide, management appears to have finally developed a more effective strategy. To do so, it has focused on generating more profits from its existing business.

Ericsson Hasn’t Produced Consistent Profits

While the dot-com craze ended a long time ago, Ericsson’s management stuck with the growth-at-any-cost mindset well past that date. Ericsson was reasonably profitable in the 2004-07 stretch, earning decent profit margins and strong returns on equity for shareholders.

Since the financial crisis, however, the company has generated very low or negative returns on equity, gross margin has trended strongly lower, and EPS has been inconsistent at best.

Perhaps the most troubling development was Ericsson’s steadily dropping gross margin. From 45% in the mid-2000s, it dropped to the mid-30s for the next decade and then plunged further to 29% in 2016 and just 22% last year.

Gross margin is the profit the company makes after its cost of producing a product. Ideally, you need a much higher margin than 22% when selling equipment, since 22% doesn’t leave much for paying overhead, interest and taxes and engaging in R&D, and other such costs. Not surprisingly, Ericsson fell into outright unprofitability as its margins sunk.

Past Two Quarters Have Been Much Stronger

Ericsson’s management has realized that it has a severe profitability problem. As a result, the company engaged in an ambitious 10 billion Swedish Krona ($1.13 billion) cost-cutting program.

That’s a huge deal. Since Ericsson earned $24 billion in revenues last year, that amounts to cutting costs equivalent to almost 5% of revenues. As you would expect, this is having a major effect in improving the company’s profitability.

In addition, while continuing to invest heavily in its core markets, Ericsson is divesting assets. Gone are the days where the company grew revenues merely for the sake of building its empire. The new approach is much more tactical and, by focusing on the company’s strengths, could finally pull ERIC stock out of its long slumber.

For this quarter, Ericsson got its gross margin back up to a much more respectable 36%. It doubled its operating margin and, to the surprise of analysts, moved back into positive operating earnings territory. Its CEO, Borje Ekholm, stated that: “We have good market traction in networks, with a sales growth of 2%, particularly in North America where all major operators are preparing for 5G.”

Momentum Should Continue

If Ericsson can maintain the trend established over the past two quarters, ERIC stock should continue moving higher. And there is a good chance that the positive tendency will carry on and perhaps accelerate further.

That’s because Ericsson is in the sweet spot. It is benefiting from both its aggressive cost-cutting moves and a strong uptick in demand for its products. This should lead to higher revenues, while the company is keeping a tight grip on costs. Combine the two, and you have the recipe for an explosive move upward in margins and earnings.

Importantly, telecom cycles tend to be quite long. North America, in particular, is just gearing up for the 5G rollout, and this will be a many-quarter story. This isn’t something like memory chips, for example, where demand can come and go in a flash.

Ericsson should be able to earn high returns on its 5G offerings for quite a long time to come. Filter those increasing revenues across a leaner cost structure, and Ericsson should be set for its strongest string of profits since the 2004-07 period.

It’s Not All Good News for Ericsson

To be fair, ERIC stock still has some challenges ahead. For one, don’t expect much revenue growth out of the company anytime soon. While its more tactical approach going forward should yield greater profits, it won’t do much for the top line.

In addition, Ericsson had generated tons of business from China’s long-running and expensive 4G build-out. China’s 4G network is nearing completion, however, and Ericsson will see revenues from that market continue to lag for quite a while. There may be some overall softness as 4G winds down, but we’re still at the beginning of 5G adoption in other markets.

Finally, due to the global nature of Ericsson’s business, the company faces a good deal of impact from foreign currency fluctuations. In a recent quarter, for example, a sharp decline in the value of the South African rand hit Ericsson’s results.

Given all the issues with emerging markets this year, and a resurgent U.S. dollar, it wouldn’t be surprising if Ericsson faces some headwinds from currency effects in the back half of 2018.

At 52-Week Highs, ERIC Stock Has More Room to Run

I’m often cautious of buying stocks when they are near the top of their annual range. And with Wednesday’s excellent earnings results, ERIC stock moved to new highs.

That said, in this particular case, we’re looking at a company that appears to be in the early innings of a multiyear turnaround. As such, the stock, while already way up from its lows, looks to have quite a bit more room to go.

While there are some potential obstacles for ERIC stock, the balance of factors point to the run higher continuing. ERIC stock has been outperforming rival Nokia (NYSE:NOK) as of late, and it’s not hard to see why.

With the combination of improving demand and much stronger profitability, Ericsson appears to have finally turned the corner. After years of dismal performance, ERIC stock could be in the midst of a big move. Next stop: $10.

At the time of this writing, the author held no positions in the aforementioned securities.