What Makes Ericsson (ERIC) a Promising Investment Option?
Despite the coronavirus-induced market volatility, earnings estimates for the next fiscal for Ericsson ERIC have increased 10% since March 2020, while those for the current fiscal have remained steady over the past 90 days, implying robust inherent growth potential. With healthy fundamentals, this Zacks Rank #2 (Buy) stock appears to be a solid investment option at the moment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Growth Drivers
Notwithstanding challenging macroeconomic conditions associated with the COVID-19 pandemic, Ericsson is focusing on 5G system development and has undertaken many notable endeavors to position itself for market leadership on 5G. The company believes that standardization of 5G is the cornerstone for digitization of industries and broadband. Moreover, Ericsson foresees mainstream 4G offerings to give way to 5G technology in the future.
The impending deployment of 5G networks in 2020 is expected to boost the adoption of IoT devices, with technologies like network slicing gaining more prominence. The Ericsson Mobility report suggests that almost 90% of existing smartphone subscriptions on 3G and 4G networks will be upgraded to the 5G network when it becomes commercially available in 2020. Ericsson has already introduced pre-standard 5G networks. 5G will accelerate the digital transformation in many industries, enabling new use cases in areas such as IoT, automation, transport and Big Data. The report also forecasts 550 million 5G subscriptions in 2022, with North America expected to lead the way. Such positive industry trends are expected to boost the company’s long-term growth.
Ericsson recently achieved a significant milestone with the commercial availability of its Standalone 5G NR software for service providers in the 5G mid and low bands. With this, the company has taken the next big step in the evolution of the 5G ecosystem to make it more pervasive across the globe. Ericsson currently has 97 commercial 5G agreements with operators (of which 55 are publicly stated) and includes 45 live 5G networks on four continents.
Notably, 5G networks were until now deployed mostly in Non-standalone (NSA) mode, whereby 5G network availability was dependent on the underlying LTE network for signaling support. The Standalone 5G NR software eliminates this 4G dependency by enabling carriers to augment their network capabilities with a simpler architecture. Moreover, it improves network speed and simplifies mobility management with seamless access to wide 5G bands for better user experience.
Impressively, all Ericsson Radio Systems deployed since 2015 could be upgraded to the Standalone mode with the installation of a software. This, in turn, is likely to enable service providers to deploy 5G services to business enterprises for improved operational efficiencies with low latency and fast response times.
The Ericsson Radio System comprises hardware, software and services for radio, RAN Compute, antenna system, transport, power and site solutions. It enables smooth and cost-effective migration from 4G to 5G, supporting communications service providers to launch the avant-garde technology and grow 5G coverage faster. The company’s 5G radio access technologies provide the infrastructure required to meet the growing demand for high-bandwidth connections and support the real-time, low-latency, high-reliability communication requirements of mission-critical applications.
The company continues to focus on its restructuring plan to cut costs and streamline focus areas, as well as explore options for the media business. Ericsson’s “cost and efficiency program” has been devised to generate higher cost savings. The company is focusing on structural changes that will help generate lasting efficiency gains and boost cost competitiveness. It intends to increase investments in certain core areas to develop the product portfolio. Ericsson is also focusing on stabilizing its IT, cloud and project portfolio, and re-establishing profitability in managed services by managing its existing contracts as well as investing in automation.
With a VGM Score of A and long-term growth expectations of 26.1%, this stock appears to be an enticing investment option for the volatile market.
Other Key Picks
Some other similar-ranked stocks in the industry are Juniper Networks, Inc. JNPR, Nokia Corporation NOK and Cogent Communications Holdings, Inc. CCOI.
Juniper has a long-term earnings growth expectation of 8%.
Nokia has a long-term earnings growth expectation of 15.6%. It delivered a positive earnings surprise of 129.1%, on average, in the trailing four quarters.
Cogent has a long-term earnings growth expectation of 10.6%. It delivered a positive earnings surprise of 12.3%, on average, in the trailing four quarters.
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