Ericsson 9,73 -0,01 -0,10% (ERIC), a company founded in the late 1870‘s by Lars Magnus Ericsson in Stockholm, Sweden used to be well known for their mobile phones: at the turn of the millennium everybody owned or at least knew their little mobile phones. However, disaster struck between 2000 and 2001 and within one year, along with the imploding tech stock market, their share price plummeted from 110.55 USD to around 5 USD. The company faded away into oblivion with the emergence of the smart phones from Apple, Samsung and the like. Until now. They seem to be back into the picture all of a sudden, with a whole new technology, 5G and IoT. According to Mordor Intelligence, the market of 5G was worth 1.6 billion in 2019. However, it is expected to grow with a whopping 50 % year over year until 2025, reaching an expected market value of over 29 billion USD. In addition to that, the expected rise of the IoT market is predicted to be worth over 1256 billion USD in 2025, from approximately 690 billion USD in 2019. So the market Ericsson ventures into, definitely has a growth potential from which the company can benefit. In September 2020, Ericsson also took over US based Cradlepoint, which is the leader in Wireless WAN Edge 4G and 5G solutions for the enterprise market, expanding its operations into the 5G enterprise space.
ERIC has a market cap of 42.80 billion USD, belonging to the biggest companies in the communication equipment industry. Although ERIC has not made a positive income in the recent past, in 2019 it started to have a positive income again of over 2.2 billion USD, with a EBIT of over 1,2 billion USD. At the time of writing the share is priced at approximately 12 USD. Comparing the growth in share price of ERIC with other shares in the technology industry, it is clear that ERIC did not have an explosive growth in the recent months. ERIC has a dividend of 1.33%, which is about 0.16 USD dividend per share annually. This is rather low compared to competitors in the industry, however it is one of the few companies that actually has a dividend, although it is definitely not a dividend stock. The dividend has been decreasing in the recent years. It has a beta of 0.48, making it much less volatile compared to the Nasdaq.
Taking a look at the financial ratio’s, it has a P/E of 23.51, which is on the lower side for the whole industry. It has a P.E.G. ratio of 0.81, which is very low compared to its peers. As the ratio is lowe than 1, it means that it slightly undervalued, as investors expect some growth of this company. The company has an EPS of 0.51 USD and is expected to have an EPS of 0.73 next year, with a positive growth for the next 5 years of almost 29%. This is a relatively high growth rate compared to its competitors.
The debt/equity ratio is about 2.36. This is rather high, meaning that ERIC is a fairly risky investment and is growing by some debt. It has a current ratio of 1.31, which is somewhat lower than the industry average, again showing some risks. However it is clearly above 1.00, and this is a good sign: the company can easily pay off its current liabilities.
ERIC has a price to free cashflow ratio of 44.06. This is higher than the industry average of 16.95, showing that ERIC is overvalued. Looking at the annual report of 2019 and the latest quarterly report of 2020 (Q3) from October: it is visible that Ericsson is doing quite good and it invested approximately 188 million USD in product development last year. Looking at the Q1, Q2 and Q3 reports of 2020 it seems they most likely will invest less in product development this year. The company has seen a good growth in its network product sales, however it has a decrease in service sales compared to 2019. Its managed services, digital products and services and emerging business have all seen a slight decrease in sales compared to 2019. However, the company has earned more money from each category of sales this year. Its cash increased last year from 4.6 billion USD to approximately 5.5 billion USD.
The ROA of ERIC is 5.10% , meaning that it has a 5.10% return on its assets, which is better than the industry average and many of its peers as these have a actually a negative return. It has a return on equity of 17.80%, also much better than many of its peers in the communication equipment industry. It has quite a low return on investment on the other hand, 2.80%, lower than many of its peers. It could definitely make some more efficient investments.
Doing a technical analysis to find out the short-term trends, it has a RSI of about 46, meaning it might be slightly overbought. The MA cross just has crossed each other on December 18th 2020, with the buying line above the selling line, so the time to buy is nearing.
To conclude, the market ERIC is in has great growth potential and ERIC is one of the few companies having a rather big share of the 5G implantation market. As this market will most certainly grow in coming years, so will ERIC most likely. It has recently took over one of the biggest 5G providers in the USA, which is a big market for 5G, strengthening its position as a global 5G provider. However, looking at its fundamentals, they could be better. In addition, there are clear signs that ERIC is overvalued. Be that as it may, the company has a good cashflow, with a non-volatile shares. If investors want to buy Ericsson, I highly suggest to buy soon, as the technical analysis shows that the price is currently in a dip.
Max Ritt has over 4 years of experience with trading and analyzing ETFs and shares. He predicted the economic implications of the election of president Trump and the BREXIT well ahead of others. Recently, he started the MaxRitt.nl webpage where he blogs mainly about investing.
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