Ericsson Is Facing the Limitation of Hope

The company is finding the promise of 5G isn’t the same as profits

For the last six months, the story of Ericsson (NASDAQ:ERIC) has been all about what “should” be happening. And what should be happening is ERIC stock benefiting from the launch of 5G technology.

Ericsson (ERIC) Stock Moves -0.49%: What You Should Know
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In fact, the United States government was actively lobbying to keep foreign countries from engaging with Chinese competitor Huawei. It would all seem to line up that Ericsson should benefit.

But if the company is getting a lift from 5G, you wouldn’t be able to tell from the company’s stock price. ERIC stock is down over 1% in 2020. That also closely approximates the performance of the stock for the last 12 months.

The Bullish Case for ERIC Stock

Analysts are excited about the return of profitability for Ericsson’s Networks and Digital Services business. This unit of Ericsson took on restructuring charges and steep losses in 2017 and 2018. The company posted net income of $195 million, with a net income margin of less than 1%.

Ericsson has over 75 commercial 5G agreements and 24 live 5G networks. Ericsson’s strong growth potential in 5G operations in North America, analysts believe that the company’s stock is undervalued.

And despite the fact that Ericsson reported disappointing earnings in late January, analysts seem unfazed. Citi analyst Amit Harchandani said he expects the company’s consensus 2020 earnings before interest and tax expectations to be 5% to 10% less due to higher operating costs.

While a weaker quarter was widely anticipated…we would be buyers of any sustained weakness as we see multiple reasons for optimism beyond the headline metrics.

But instead of going up, the stock promptly declined about 5%. It has since recaptured all those losses and briefly turned positive for the year. However, that would turn out to be short-lived.

One of the reasons the stock was going down, Ericsson’s leading competitors, Nokia (NYSE:NOK) also revised its 2020 earnings guidance lower. While this is, unfortunately, a rather common occurrence for Nokia, it points out the reality of the emerging 5G trend. The companies that are going to compete in 5G are going to have to spend a lot of money.

And in the short-term, that means they will have a tough time generating significant profits. That makes it hard to see the stocks going up significantly.

Ericsson Having a Hard Time Defending its Home Turf

The United States actively lobbied Great Britain to keep Huawei from building out the country’s 5G infrastructure. Despite that pressure, in late January Britain announced it would allow Huawei to participate in building the country’s infrastructure with restrictions.

The bad news for Ericsson didn’t stop there. European Union (EU) countries followed suit in allowing Huawei to participate. Both Ericsson and Nokia are headquarted in Europe. Undoubtedly, the companies were hoping that Huawei might be subject to a ban in the European countries.

Ericsson’s CEO tried to dispel any notion that Ericsson was lagging behind in 5G. Speaking to reporters at the World Economic Forum in Davos, Switzerland, Ericsson CEO Borje Ekholm said he saw “no one ahead of us (Ericsson)” in 5G technology. Ekholm went on to say that Ericsson’s equipment was the first to be used in North America and Europe.

Don’t Fight the Chart

Analysts are high on ERIC stock. The consensus rating from 13 analysts is a “buy.” And the stock has a 12-month price target of $10.27, nearly 20% more than its current level. But my concern is that analysts have been touting the benefits of ERIC stock for awhile now. And the stock continues to stay in a tight range.

And that means that no matter what you feel should happen to Ericsson stock, you have to pay attention to the chart. No matter what the analysts say, the proof for Ericsson will be in the profits, or the lack thereof.

As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

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