What little enthusiasm I had for Ericsson (NASDAQ:ERIC) stock in December faded away before the market’s recent corona virus-inspired bloodbath because of the reality of the 5G “revolution” has not matched the hype. That’s especially the case of Ericsson and other suppliers such as Nokia (NYSE:NOK) and Cisco Systems (NASDAQ:CSCO).
For one thing, as Light Reading recently reported, most wireless providers are buying their 5G equipment from the same vendors where they acquired their 4G gear. That’s because switching providers is a huge hassle. Therefore, investors should take any mention of any 5G deals with a massive grain of salt.
Ericsson also has had its share of challenges, including a $1 billion legal settlement it paid to the U.S. government last year for violations of the Foreign Corrupt Practices Act (FCPA).
“While the Swedish vendor does seem to be improving its market position, it has been forced to hack into costs to make profits look respectable,” Light Reading says. “In the last five years, Ericsson’s workforce has shrunk by more than 18,600 employees as it has sold assets and `digitized’ operations.”
ERIC Financial Performance Has Disappointed Wall Street
My fellow InvestorPlace contributor Vince Martin recently argued that when investors ignore one-time costs like the FCPA fine, Ericsson’s balance sheet looks good. He also credits ERIC stock for taking out $1 billion in expenses and notes the Swedish company aims to generate 12%-14% margins in 2022, compared with an adjusted 9.7% in 2019.
For me, though, the case against Ericsson stock is clear both from a fundamental and valuation point of view.
Ericcson’s latest earnings report disappointed investors because of a “temporary” slowdown in U.S. demand for 5G equipment caused by delays in closing the proposed $26.5 billion merger between T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) merger, which a group of 15 attorneys general tried to block.
Moreover, President Donald Trump’s administration’s efforts to persuade other countries not to use 5G gear made by Huawei because of security concerns about the Chinese company haven’t gained much traction. That’s because U.S. allies, including the U.K., wouldn’t go along with the plan, according to the Wall Street Journal.
Opposition To 5G Gaining Momentum
Some cities and towns have banned the antennas wireless companies need to deploy to deliver 5G speeds to consumers because of concerns over potential health effects and complaints about their aesthetics. A group of cities is suing the Federal Communications Commission over a regulation that requires them to decide on siting antennas in 60 to 90 days. Local governments also want to charge wireless companies premium prices to access their infrastructure, the newspaper says.
ERIC stock trades at a multiple of 16 times next year’s earnings. Nokia’s forward price-earnings ratio is valued at 14, while the valuation for CSCO is at 12. Each of the stocks has fallen more than 20% this year. Revenue growth at EIC is expected to top 4% in 20, better than the 1.2% and 1.9% gains expected of NOK and CSCO, respectively.
Ericsson stock is trading a 34% discount off the average 52-week price target of $10.28. NOK is trading at a 50% discount to its median price target of $4.91. Cisco’s recent price of $35.76 is roughly 50% below the median analysts’ target of $50.
For now, the potential risks from buying ERIC stock outweigh its many potential risks.
“Despite all the previous hype, 2020 seems unlikely to be a glorious year for the telecom industry,” Light Reading says. “Forecasts had been lowered even before the outbreak of the new coronavirus, COVID-19, which prompted the cancellation of (The Mobile World Congress) and now threatens global supply chains.”
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.