Down 16% This Year Amid A Weak Demand In The U.S., What Lies Ahead For Ericsson Stock?

Ericsson stock (NASDAQ: ERIC) has declined by about 16% year-to-date, underperforming the broader indices. Ericsson posted a mixed set of Q3 2023 results last month, as demand for 5G networking equipment continued to cool off globally amid increasing macro uncertainty. Ericsson’s revenue for the quarter declined by 5% year-over-year to SEK 64.5 billion ($6.14 billion), with adjusted net income coming in at SEK 1.4 billion (about $130 million), down from SEK 5.4 billion ($510 million) in the year-ago quarter. Sales for the networking division in North America declined by 60% versus last year due to inventory adjustments by major carriers and a slower pace of deployment of new equipment. However, this was partly offset by growth in India – where a rapid build out and market share gains are driving growth for Ericsson. Moreover, other early 5G markets have resumed investments in the technology. Overall sales to the South East Asia, Oceania, and India region rose 74% year-over-year. Margins have also taken a hit, with gross margins falling to 39.2% down from 41.4% in the year-ago period, due to a lower mix of sales from the U.S. – which is seen as a high-value market. Things are expected to remain mixed over Q4 as well, amid continued macroeconomic uncertainty, which could impact investments by large players. However, the company has guided that operating margins, excluding restructuring, could come in at about 10%, up from 5.9% in Q3 2023.

Amid the current backdrop, ERIC stock has suffered a sharp decline of 60% from levels of $12 in early January 2021 to around $5 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. Notably, ERIC stock has underperformed the broader market in each of the last 3 years. Returns for the stock were -9% in 2021, -46% in 2022, and -16% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 18% in 2023 (YTD) – indicating that ERIC underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ERIC face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Although there are near-term headwinds for the stock, we think Ericsson’s valuation appears quite attractive, with the stock trading at about 10x consensus 2024 results. While near-term revenue growth is likely to be elusive, the telecom industry at large is still in the early stages of the 5G rollout and there remains a reasonably long runway, especially in emerging markets. This could drive demand for Ericsson’s products and services in the long run. Moreover, Ericsson is also looking to bolster its profitability via cost cuts. Ericsson announced earlier this year that it would cut 8% of its global workforce or about 8,500 workers. The company increased its previously announced 2023 cost-saving target of SEK 11 billion ($1 billion) to SEK 12 billion (about $1.1 billion) now, noting that it could carry out further cost cuts if required. We value Ericsson stock at about $7 per share, which is well ahead of the current market price. See our analysis on Ericsson Valuation: Expensive or Cheap for more details on what’s driving our price estimate for the stock. Also, see our analysis of Ericsson Revenues for more details on Ericsson’s key revenue streams.

[1] Month-to-date and year-to-date as of 11/20/2023
[2] Cumulative total returns since the end of 2016

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