At Some Point, 5G Will Make Ericsson a Buy But Not Now

I understand why many investors are high on Ericsson (NASDAQ:ERIC). But I also see that ERIC stock has been running in place. And it seems that the goalposts for the implementation of 5G technology continue to move.

At Some Point, 5G Will Make Ericsson a Buy But Not Now
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When I last wrote about Ericsson back in February, the nation was only starting to grasp the full impact of the novel coronavirus. And at that time, I was taking an “if not now, when” approach to Ericsson stock.

The U.S. government was actively trying to keep foreign countries from doing business with Huawei. And more deals were being finalized to implement 5G technology, and Ericsson was benefiting from both of those developments. In fact, my InvestorPlace colleague David Moadel gives readers just a sample of the deals that Ericsson has in place.

But no matter how good the news gets, investors don’t seem to be buying it. ERIC stock is up about 2% in 2020 but is down about 7% over the last 12 months.

5G Is the Future, But the Goalposts Are Moving

The research firm CCS Insight predicts has also adjusted its near-term outlook for the adoption of 5G technology. The company is acknowledging the near-term delays but is saying that the global mobile phone market will make a full recovery by 2022.

With that in mind, CCS predicts that there will be more than one billion 5G connections in 2022 and more than 3.2 billion in 2025. But we were supposed to have been well into the 5G revolution by now.

5G is unquestionably going to happen. It has to, but the timeframe has moved. Many countries and companies are facing financial distress. And that means that, in some cases, 5G projects may have to wait.

Be Willing to Wait on ERIC Stock

One of the most telling things about a company’s earnings report is to hear from the company’s executives themselves. But you have to be willing to hear what the executives are saying. It seems that, perhaps, many investors are taking what Ericsson says to heart.

At the end of its last quarter, Ericsson had 86 signed commercial 5G contracts worldwide. The company also had 31 live networks. But developing a 5G infrastructure is an expensive undertaking. And Börje Ekholm, Ericsson’s president and chief executive officer (CEO) acknowledged on the earnings call that Ericsson would have a softer second quarter.

One of the reasons for this was the Covid-19 pandemic. However, Ekholm also said that a number of the company’s strategic contracts would fall in the current quarter rather than spreading out the loss evenly. The CEO also said the decline would be felt in China.

When pressed by analysts, Ekholm was strident in his belief that the overall impact on Ericsson’s business from Covid-19 would be negligible. To that extent, the company did not revise their future guidance, which is a triumph in and of itself. But Ekholm’s comments are revealing:

The COVID-19 impact is, of course, hard to assess. And we need to be a bit humbled in predicting what is going to impact. On the one hand, if we look globally, we see a number of countries, actually accelerating investments into 5G as well as 4G capacity. In response to the pandemic, one of the clear cases is clearly China. But if you look in Europe, it’s doing the opposite, slowing down adoption of 5G.

The Bottom Line on Ericsson

I agree with Mark Hake, who wrote in a recent article, “Frankly, there is no great compelling reason to buy the company.” I encourage you to read the entire article; Hake’s stance is not as draconian as it sounds. In fact, Hake and I make similar arguments.

Just based on the 5G outlook, ERIC stock should be much higher. But it’s not. And it’s up to investors to figure out why. In my opinion, it’s simply because the promise of 5G has not arrived. And that’s not a criticism of the stock; it just means the future hasn’t arrived yet. And why pay more for a future that’s not here yet.

Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.

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