Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) — Ericsson to you and me — remains in a rut. Back in July, when the company reported its second quarter earnings, a big performance drove ERIC to $11.59, gaining 20% in just two days.
However it has since plateaued and been sideswiped by the broad selloff of tech stocks at the start of September. Now trading around $10.60, Ericsson is an affordable pick as a stock that’s set to benefit from ongoing carrier investment in 5G infrastructure.
Ericsson may be struggling to regain the ground it gave up in September, but ERIC has still posted a gain of nearly 18% in 2020.
A Global 5G Infrastructure Leader
Ericsson’s focus is on telecommunications networking. Over the past several years, that has meant continued paydays as telecoms spend to build out their 5G networks.
Ericsson is one of the largest 5G infrastructure providers and at last count, had reported 109 commercial 5G contracts. This spending on 5G networking infrastructure has helped to power Ericsson stock over the past two years.
That spending isn’t expected to stop any time soon — at this point most telecoms have 5G coverage only in large cities. And most of that coverage is relatively slow, low-band 5G. Carriers are in early stages of rolling out much faster millimeter Wave 5G gear — again, with Ericsson as a key supplier.
Don’t Forget the 5G Patents
It’s natural to focus on the revenue potential of Ericsson’s 5G infrastructure business. However, that’s not the company’s sole source of revenue from the 5G revolution. Ericsson also owns a series of patents on 5G-related technology used in smartphones.
Those patents mean Ericsson collects royalties of as much as $5 per phone sold. That may not sound like much, but with millions of devices being sold, that quickly adds up. Estimates put the annual royalty haul from smartphone sales by 5G patent holders — of which Ericsson is one of the “big three” that net a combined 90% of the proceeds — at $20 billion.
With the speeds promised by 5G, analysts are expecting a new wave of smartphone upgrades. After several years of declining global smartphone sales, a 2020 Morgan Stanley report predicts 5G adoption will result in 0.8% annual smartphone sales growth this year, and 3.6% growth in 2021.
More smartphone sales means more royalty payments by manufacturers. And, as Morgan Stanley points out, more 5G smartphones in the hands of consumers puts the pressure on telecoms to build out their 5G networks:
This all plays into a virtuous cycle in which more 5G devices spur more investments in infrastructure and app development, which in turn drives greater demand for 5G devices.
It’s a self-sustaining 5G cycle that holds nothing but positives for Ericsson stock for at least the next few years,
Bottom Line on Ericsson Stock
ERIC effectively plateaued back in July, unable to break the $12 ceiling until late August. And it definitely felt the effects of the September tech sector selloff and has yet to recover.
However, investment analysts seem to have a pretty good feeling about the company’s prospects. Those tracked by The Wall Street Journal give Ericsson stock an overweight rating, with an average $12.02 price target.
Perhaps more telling is the fact that the most bearish of the 27 analysts has a 12-month price target of $9.36, suggesting even they don’t feel shares are at risk of any serious contraction.
Although Ericsson stock has a ‘B’ rating in Portfolio Grader, it still represents a good value with excellent long-term growth potential. That’s why ERIC made my recent list of “The 7 Best 5G Stocks to Buy Now for Long-Term Growth.” With Ericsson stock still struggling to regain its footing since the start of September, it makes an attractively priced, low-risk pick for anyone who wants to capitalize on the 5G revolution.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
