Is Ericsson Stock A Buy Despite Lull In North America?

Ericsson stock (NASDAQ
NDAQ
: ERIC) has declined by about 16% year-to-date, considerably underperforming the broader indices. Ericsson posted a mixed set of Q2 2023 results last week, as demand for 5G networking equipment has cooled a bit. Ericsson’s revenue for the quarter grew 3% to 64.4 billion Swedish kronor (about $6.3 billion) while posting a net loss of SEK -0.6 billion ($59 million) due to restructuring charges. While Ericsson is seeing a strong uptake from its South East Asia, Oceania, and India segment, with sales rising 71% organically year-over-year, the situation remains tough in North America with sales down by about 42% year-over-year, due to weaker capital spending by carriers and also due to inventory drawdowns by customers. The weaker sales from the U.S. – which is seen as a high-value market – have also impacted Ericsson’s margins. Gross margin, excluding restructuring, declined by 390 basis points year-over-year to 38.3%. Things are expected to remain mixed over Q3 as well, with the company guiding for operating margins to be in line with or slightly higher than Q2.

So is Ericsson stock a buy at current levels of about $5 per share? Although there are near-term headwinds for the stock, we think Ericsson’s valuation appears quite attractive, with the stock trading at about 13x consensus 2023 earnings, and 8x 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. 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. The company is targeting run-rate cost reductions to the tune of 9 billion Swedish kronor (about $860 million), by the end of this year. 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.

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