Buy Ericsson Stock on the Dip as Market Volatility Returns

This article was originally published on this site

So far in 2020, Ericsson (NASDAQ:ERIC) is up more than 2.5%. Yet that number tells only half the story. On March 16, ERIC stock hit a 52-week low of $6.15. Now, it is hovering at $9. Put another way, if you were brave enough to invest $1,000 in the shares in late March, your investment would have surpassed $1,400.

Source: rafapress / Shutterstock.com

Many investors are now wondering if they should chase the recent move up in the group. Therefore today, I’ll take a closer look at whether ERIC stock should belong in a long-term portfolio.

In the coming days, short-term profit-taking will likely push the stock toward $8. In case of such a potential price decline, market participants with a 2-3 year time horizon may consider investing in the Swedish technology group.

ERIC Stock and 5G

Sweden-headquartered Ericsson is a multinational networking and telecommunications company. Its history dates back to 1876 and the group currently holds close to 50,000 patents, including many in wireless communications. InvestorPlace readers may also know of Ericsson as the inventor of Bluetooth technology.

In late April, Ericsson released Q1 results that matched analysts’ earnings estimates. Net income in the March quarter was $223 million or 8 cents per share. Quarterly net sales went up by 1.7% YoY to $5,145 million.

It divides revenue into four segments:

  • Networks (around 71% of revenue);
  • Digital services (around 14.5% of revenue);
  • Managed services (around 11.5% of revenue);
  • Emerging business and other (around 3% of revenue).

Networks sales adjusted for comparable units and currency was flat YoY. Growth in North America, Saudi Arabia and Japan was offset by a decline primarily in Latin America, India and North East Asia excluding Japan.

The segment’s gross margin increased to 44.4% year over year from 43.2%, supported by a favorable business mix including a higher share of software sales. The operating margin improved to 16.6% from 16.3%.

CEO Borje Ekholm said Ericsson’s “5G equipment is used in 29 live networks across four continents. As a further proofpoint of our technology leadership we were awarded an increased market share from one of the operators in China.”

Management is quite optimistic that going forward, 5G technology will likely drive the company’s growth. And the global rollout of 5G is already beginning to affect a broad range of companies, from mobile networks, to, artificial intelligence, healthcare and gaming.

Yet despite the promising 5G outlook for the group, management warned of slowdown for Q2, mostly due to the timing of strategic contracts and uncertainty induced by the coronavirus pandemic.

Where ERIC Stock Price is Now

In mid-May 2011, ERIC stock traded over $15. Since then, it has come under pressure. The shares started 2020 around $9. But by mid-March, they hit a 52-week low of $6.15. Around the release of Q1 earnings, the stock hovered at $8.

To the delight of shareholders, in the second quarter, ERIC stock came fast to hit a 52-week high of $9.88 on June 3, 2020. As I write the shares are about $9.

Are you an investor that also follows technical charts? Then you may be interested to know that there may be further pressure in ERIC stock toward the $8.5- or even $8-level, where it’d find major support.

Since mid-June, volatility has come back to the markets. The earlier rally we’ve witnessed in broader markets, especially in tech stocks, for the most part, reflects the belief in a V-shaped recovery for our economy.

However, if there were an upcoming change in investor sentiment on the rebound’s prospects, then these stock valuations would come down fast, and tech stocks like ERIC would likely be hit the hardest.

Yet, such a decline would also give long-term investors a better entry point into the stock. Also Ericsson’s P/S ratio currently stands at 1.24. The metric puts the company at a favorable long-term position from a risk/return perspective. Coupled with the 5G growth prospects, it also gives long-term investors reasonable hope that the stock does not have to be mired in single-digit status forever.

The Bottom Line on ERIC Stock

The group’s 5G upgrade cycle is going well and will likely produce accelerated growth in the coming quarters. Ericsson has also been increasing its customer base. For example on June 25, it announced that Rogers Communications, Canada’s first 5G network, has chosen Ericsson as the “the sole supplier for the 5G radio access network (RAN) and 5G core (5GC) for Rogers’ 5G network.”

Currently, Ericsson has sizable exposure to North America, where there are major 5G infrastructure upgrades. Therefore the share are likely to benefit from long-term growth catalysts. And before too long, the shares are likely to go to double digits.

However, in the past three months, the ERIC stock is up over 40%. So short-term profit-taking is likely to put pressure on the share price. Have you been able to ride the recent wave up in the stock? Then you may want to realize some of your paper profits.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.