The launch of 5G and the acceleration of the adoption of the technology in 2020 and beyond are likely to be game-changers for many companies and industries. Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) is one company that looks well-positioned to be turned around by 5G. Market participants, however, remain skeptical about Ericsson stock, as indicated by the sideways movement of Ericsson stock over the last year.
However, there is little doubt that Ericsson’s business is improving, and I am bullish on the shares’ medium-term to long-term outlook. This column will elaborate on the company’s growth outlook, and it will focus on the company’s opportunities in 5G and other emerging technologies.
From a technical perspective, Ericsson stock has strong support in the range of $7.5 to $8.0. In the last seven months, the stock has bounced back strongly from these levels. Therefore, the current stock price of $7.82 seems attractive.
Ericsson Is Likely to Grow Rapidly in North America
Ericsson’s networks business generated 68% of its revenue in fiscal 2019. Further, North America contributed 31% of its FY19 revenue. I believe that the company’s North America networks business will remain a key growth driver for the company in FY20 and the next five years.
As a matter of fact, the market share of Ericsson’s RAN unit in North America was 48% in FY18, and its market share has jumped to 52% in FY19. Therefore, with its leading market position, Ericsson is well-positioned to capitalize on the 5G opportunity.
To capitalize on the impending opportunity, Ericsson is already building a $100 million factory that will manufacture 5G components in Texas.
Ericsson has partnered with the likes of Sprint (NYSE:S), T-Mobile (NASDAQ:TMUS), Verizon (NYSE:VZ) and AT&T (NYSE:T). The point I am making is that Ericsson has a strong foothold in North America. That will translate into top-line growth, margin expansion and cash flow growth for the firm.
Underlining the potential of 5G over the next five years, Ericsson believes that, by 2025, there will be 320 million consumers with 5G subscriptions in North America. That presents a big opportunity.
5G is already boosting the company’s sales. In FY19, the company’s North America revenue jumped nearly 20% year-over-year to 70.2 billion SEK.
Ericsson Will Grow in China
China is likely to be another growth catalyst for Ericsson, even though Huawei Technologies is likely to be the clear leader of the market.
In the country’s telecom network infrastructure market, Ericsson is ranked second, trailing only Huawei. Nokia (NYSE:NOK) is third in terms of revenue.
However, the key difference between Ericsson and Nokia is that the latter company is unlikely to focus on China.
On Nokia’s fourth-quarter earnings conference call, the company said it “will be prudent in 5G while targeting more attractive opportunities.” Since the profitability of Nokia’s 5G contracts is uncertain, this statement seems to be an indication that the company will scale down its efforts in China.
On the other hand, Ericsson sounds bullish on China. On the company’s Q3 earnings conference call, it said it wants to be “stronger in China… in 5G than we were in 4G.”
With China expected to invest $150 billion in 5G networks through 2025, it is a big addressable market for Ericsson. Even if Ericsson can grab 15% to 20% of the potential investment opportunity, its growth is likely to be healthy.
Emerging Businesses, Innovation Will Raise Ericsson’s Growth
For FY20, Ericsson is targeting sales in the range of 6 to 8 billion SEK. While its operating income will remain negative, it does have the following key positive catalysts:
- It has emerging Internet of Things (IoT) and Media businesses. In particular, IoT can be a game changer for the company in the next five years.
- Ericsson’s focus on AI, IoT, and augmented reality, along with other emerging technologies, will ensure that Ericsson does not fall behind the curve.
My Concluding Thoughts on Ericsson Stock
Ericsson stock has been largely rangebound in the last year, but the company is making progress on 5G. The next 12-24 months should provide further clarity on its growth trajectory, and I am optimistic about its outlook.
Ericsson is well-positioned in North America, and the region will drive its top-line growth. While its growth in Europe has stagnated, the Middle East, Africa, Southeast Asia and India provide attractive opportunities for the company.
In addition, the company is expecting its margins to expand and, as its free cash flow swells, the stock is likely to move higher.
Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
