Two Key Factors to Consider for a Possible Recovery in Ericsson Stock

Like most tech stocks, LM Ericsson (NASDAQ:ERIC) has seen its share value take a wild ride in 2020. From a high close of $9.21 on Feb. 12, Ericsson stock plunged to $6.17 in mid-March. Since then, it has been in recovery mode, although that has seemed to plateau over the past two weeks. How the stock performs over the next 12 months is going to largely depend on two factors: 5G and the novel coronavirus.

Two Key Factors to Consider for a Possible Recovery in Ericsson Stock

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Complicating maters, these two variables are very much intertwined. 

Ericsson at the Heart of 5G Race

In February, InvestorPlace contributor Vince Martin wrote that Ericsson stock “might be the best 5G play.” Why? Because Ericsson’s 5G potential is often overshadowed by competitors like Qualcomm (NASDAQ:QCOM) and China’s Huawei. 

Huawei gets many of the 5G headlines thanks to security tensions between the U.S. and China. Qualcomm gets coverage because of the expected payoff as smartphones transition to mainstream 5G support. Currently, major players, including Apple’s (NASAQ:AAPL) iPhone, lack 5G. It’s hoped that mainstream 5G will be a revolution that results in a wave of consumer smartphone upgrades. With its 5G modems in most of those new smartphones (including the iPhone), Qualcomm would benefit.

However, in order for consumers to actually see the promised performance of their 5G smartphone, the network infrastructure must be in place. And that’s where Ericsson comes in. The company is locked in a global race with Huawei and Nokia (NYSE:NOK) to sign commercial clients to deploy 5G infrastructure. Ericsson has been maintaining the lead — it currently claims 91 commercial contracts signed, globally — but Nokia and Huawei aren’t far behind.

The race has become heavily politicized, with the U.S. raising security concerns about Huawei. That reached a crescendo in February where Attorney General William Barr suggested the U.S. should consider taking an ownership stake in Ericsson or Nokia to lend strength to the efforts to beat out Huawei in 5G deployments.

Syracuse University economics professor Mary Lovely told the Washington Post the Attorney General’s proposal was unprecedented: “I do not know of another instance when a U.S. executive branch official has called for U.S. private investment in a foreign company to advance national security.”  

It wasn’t a coincidence that in the four days after Barr’s speech, Ericsson stock gained 11%. As mentioned earlier, it closed at $9.21 on Feb. 12, its 2020 high.

Coronavirus Impact on 5G

The coronavirus pandemic creates concerns about 5G implementation, and those are weighing on Ericsson stock.

There have already been rumblings that the coronavirus pandemic could result in 5G rollout delays. Wireless carriers are evaluating the impact of the coronavirus on their bottom line, and that could slow their investment in new infrastructure. In addition, lockdowns are impacting installation and the travel of supporting employees.

At the start of May, Ericsson’s CEO confirmed the issue, telling The Verge: “COVID-19 and actions taken by governments to slow down the spread are making our service delivery and supply harder due to lockdowns and travel restrictions in many countries.” 

On the other hand, the coronavirus lockdown has led to a massive increase in working from home. That’s put pressure on network bandwidth, especially with home broadband. Applications like video conferencing require high speeds and robust connections in order to be effective. With the potential that many companies may transition positions to a work from home role on a permanent basis, the demand for ultra-fast 5G connectivity could get a push. 

The Bottom Line on Ericsson Stock

Ericsson stock has lost about 11% at this point in 2020. Its performance over the next 12 months is largely tied to carrier 5G rollouts and coronavirus pandemic effects. Those two factors are inextricably tangled at the moment, making it difficult to make a call on how it’s going to shake out over the next year.

Investment analysts seem optimistic that Ericsson will continue to recover over the next year. Most have the stock rated as a buy at this point. Among those polled by CNN Business, even the most pessimistic price target has under 6% downside, while the median 12-month price target of $9.91 offers 24% upside. 

If the 5G rollout gains steam — either in spite of, or partially because of the coronavirus pandemic — Ericsson stock has a shot at even stronger performance.

Brad Moon has been writing for since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015.  As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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