As 5G Opportunity Grows, One Analyst Now Sees Ericsson Rising 33%

Technology

Published: October 1, 2019 11:45 am

Last Updated: January 30, 2020 3:12 pm

There are many winners and losers in the world of technology. One continuous trend that should bolster certain aspects of technology and communications is the rush into 5G communications. Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC), or Ericsson as we know it, is expected to be among some of the top western companies to win from 5G.

A new report from Canaccord Genuity has raised the rating to Buy from Hold and has set a new $10.50 price target (up $1.00 from its prior target). This represents roughly 33% upside from the current price of Ericsson’s American depositary shares (ADSs).

Analyst T. Michael Walkley sees growing momentum for 5G and a continued execution toward achieving its longer-term financial targets. The firm valued it at 16 times its new 2021 earnings estimate of $0.66 per share.

According to Walkley’s report, Ericsson has announced deals with Nex-Tech, RINA and KDDI, demonstrating continuing 5G momentum. There was a 12 billion Swedish kroner Department of Justice/Securities and Exchange Commission settlement provision in the third quarter, but Walkley believes the announcement represented a resolution to an overhang rather than being an ongoing issue. He also pointed out that Ericsson’s credit ratings will not be affected by the provision, with both S&P and Moody’s having upgraded their outlooks on Ericsson to Positive since its last earnings report. Those agencies also cited continued successful management execution.

The Canaccord Genuity report points out that Ericsson now has a solid foundation for continued margin expansion and that the company remains on track to achieve its 2020 operating margin target of 10% (and over 12% by 2022). Walkley said:

We believe management has successfully stabilized the business and made the necessary changes for the company to invest for the 5G cycle and remain competitive and look forward to next month’s Investor Update for further insight on progress toward long-term targets.

As for newer developments and views of the climate, the upgrade further noted:

With the recent Nex-Tech and RINA Wireless wins in the US, we believe North American momentum is continuing at elevated levels for Ericsson in 2H 2019 and could continue into the first quarter of 2020. Further, we believe the subsiding EU tensions with China continues to lower retaliation risk by Chinese operators, driving solid market share prospects for Ericsson in China. …

While 2020 could see some headwinds due to the more competitive small cell/indoor deployment ramps, we believe the T-Mobile/Sprint merger’s increased capex plans and Dish Networks’ prepaid network deployment could serve as offsetting tailwinds.

Note that defending or being aggressive on Ericsson has not played out very well for investors and analysts alike. The S&P, Nasdaq and Dow Jones industrials were all up year to date, with double-digit percentage gains through the end of the third quarter, but Ericsson is down 10% this year, after a 16% drop in the past 90 days. On a longer-term basis, Ericsson’s ADSs have done virtually nothing on its charts going back to the broader market lows of March 2009. That is atrocious compared to the key technology index gains in the past decade.

Ericsson’s ADSs traded down about 1% at $7.90 Tuesday morning, and the 5.9 million shares that had traded by 11:20 a.m. was nearly a normal trading day’s worth of volume. Ericsson’s 52-week range is $7.58 to $10.46, and its consensus analyst target price was $10.56.