Today Ericsson (NASDAQ: ERIC) reported its Q2 earnings results but a drop in margins disappointed investors.
Unfortunately, reported earnings missed analyst consensus estimates. EPS of $0.13 was -19.2% below FactSet consensus of $0.16.
Sales of $5.9bn grew 3.3% Q/Q but missed FactSet estimates of $6.05bn.
The ERIC share price is down over 10% in early market trading after climbing 2% in yesterday's session.
What is Ericsson?
Telefonaktiebolaget LM Ericsson ADR Class B (NASDAQ: ERIC), commonly known as Ericsson, is a Swedish multinational networking and telecommunications company headquartered in Stockholm.
Ericsson segments include Networks, Digital Services, Managed Services, Emerging Business and Others. The company has a $22.7bn market cap and a global presence. It is a long-standing company with much potential to improve, but bearish sentiment abounds, and investors should be aware ERIC stock does not offer a quick road to riches.
Ericsson's 5G offerings are helping keep the company relevant, but bribery investigations cloud its appeal.
The company was founded by Lars Magnus Ericsson in 1876 and is headquartered in Kista, Sweden.
On 31 July 2022, Ericsson's acquisition of Vonage Holdings Corp. is expected to close.
Bribery Investigations
Unfortunately, Ericsson is facing ongoing bribery investigations. Four former Ericsson executives were recently acquitted in Sweden. They'd been facing charges of bribing high-ranking Djibouti officials to win a 3G contract worth nearly $20m.
The company previously admitted to engaging in bribery and other misconduct in the East African country of Djibouti and paid $1bn to settle US investigations into corruption in countries including China, Indonesia, Vietnam, Djibouti and Kuwait.
Ericsson separately faces several probes for alleged corruption in Iraq. The company admits it could have made payments to the terrorist group Isis. It is fully cooperating with the US Department of Justice (DOJ) and investing in ethics and compliance. However, this has severely dented investor confidence in its governance.
5G Progression
Ericsson is heavily investing in 5G technology through its infrastructure offerings.
5G is up to 100 times faster than 4G and is set to revolutionize industries with its fast connectivity speeds, low latency and increased bandwidth.
The COVID-19 pandemic slowed down 5G adoption, but there is more appetite than ever to advance this technology, and governments are investing in its implementation.
Ericsson is investing heavily in ensuring it's at the leading edge of this technology. This includes incorporating 5G Networks, AI (Artificial Intelligence), IoT (Internet of Things), and the cloud.
Ericsson Radio System and Ericsson Spectrum Sharing are its two main 5G offerings. It also boasts the industry's most robust portfolio of essential 5G patents and is working towards global standardization.
Today, 50% of the world's 5G traffic outside of China is carried over Ericsson radio networks, and 80% of the top 20 operators in the world are using its 5G Core.
Ericsson plans to take 5G into space in partnership with Qualcomm and Thales. The trio wants to equip a network of earth-orbiting satellites with 5G coverage. In theory, the eventuality is that anyone with a 5G smartphone will be able to use 5G connectivity anywhere on Earth.
How Does Ericsson Make Money?
Ericsson makes most of its money from its Networks division. This segment sells network owners the products and services necessary to provide mobile and fixed communication.
The company also sells software, 5G system integration and implements 5G Radio Access Networks (RAN).
Ericsson also takes in revenues from its intellectual property, but this has been declining. Its IPR revenues are affected by several expiring patent license agreements. Some of these are being renegotiated, and the company is actively negotiating new deals.
ERIC Stock Financials
ERIC stock has a price-to-earnings ratio (P/E) of 9.8, compared to the industry average of 1. Its price-to-book value (P/BV) is 2.1, higher than the industry average of 0.9. Ericsson offers shareholders a 4.6% dividend yield.
High inflation and a chip shortage were blamed for a 1.3% drop in Ericsson's Q2 gross margin. The Swedish group reported a gross margin of 42.1%, down from 43.4% last year.
Meanwhile, group organic sales grew by 5% Y/Y, driven primarily by its Networks sales in North America and Europe. Reported sales were SEK 62.5bn ($54.9bn).
ERIC Growth Potential
For the full year 2022, Ericsson intends to reach its long-term target of an EBITA margin of 15% to 18% no later than two to three years out.
The company remains confident in its strong 5G patent portfolio and seeks to optimize the return from this area.
It also invests in continuous R&D to create added customer value, such as energy-saving solutions and flexible deployment options. Its Ericsson Silicon, which features in next-generation ASICs and Cloud RAN, already offers these valuable features.
Chunghwa Telecom cuts its energy use by more than one third using Ericsson 5G RAN solutions.
ERIC Stock Risks
The ERIC stock price has been falling since April 2021. The bribery investigations didn't help. The war in Ukraine caused disruption, while a slowdown in 5G adoption also hampered sales. The expiry of licenses is hanging over the company, and it needs some good news to encourage investors.
Disruption to global supply chains, inflation, and lack of progress in 5G adoption continue to pose a risk to the share price. Furthermore, a lack of trust in the leadership team and the potential for significant fines are also a cloud over ERIC stock.
Should You Invest in Ericsson?
Ericsson is firmly established. It makes money and operates in a critical area of global growth. It also offers an attractive dividend. However, the problems that have hit the ERIC share price in recent months have not disappeared. Until they're resolved, ERIC stock could have further to fall.
Erik Börje Ekholm, President, CEO & Director, Telefonaktiebolaget LM Ericsson, said:
The key way for us to short-term combat inflationary pressures is actually by introducing or coming up with product substitution.
This allows the group to price new features competitively and lowers the product's cost.
we remain very committed to that model, that's been with us since 2017 and we continue to see the benefits of that.
Analysts at Banco Santander Equity Research and Oddo BHF Corporates & Markets have put a Buy rating on ERIC stock with a target share price of $10.11 and $10.02, respectively.
FactSet analyst estimates have an overall Overweight rating on the stock and a target share price of $11.21.
In some ways, Ericsson stock is an attractive investment, but potential shareholders need to be aware of the risks and see this as a long-term opportunity.