When Ericsson (ERIC) posted strong second quarter results thanks to strong growth in 5G, stocks rose 13.20% on the day. The stock has surpassed its high of 2019 and could reach new heights for six long years. With the stock at 52 week highs and with a market cap of $ 36 billion, Ericsson is, for now, a better stock than Nokia (NOK). Nokia’s market capitalization exceeds that of Ericsson at 23.95 billion dollars. Although it is up 88% from year-round lows, it still has 24% to go before it returns to a 52-week high.
Why have investors offered Ericsson stocks new highs?
High 5G income
In the second quarter, Ericsson won 99 5G trade deals and 54 live networks. Conversely, Nokia won 70 commercial deals and 21 over-the-air networks in the first quarter (slide 4, presentation of first quarter results). If Nokia doesn’t report more wins in its second quarter results, investors may lose patience with holding stocks. They can take action ERIC on the expectations of the Swedish company will take market share from Nokia.
Ericsson strengthened its market position in mainland China. Supported by investments in research and development, demand for digital networks and services on the continent drove net sales 20% year-over-year. Sales in North America increased by 4% (1% after currency adjustments). However, the company is seeing its sales increase thanks to the 5G dynamic.
Source: Presentation of the call for results Ericsson Q2
Investors looking for a way to hedge against Nokia’s underperformance can add ERIC stocks even after the rally. The contract won by all major players in China suggests that operating margins of 8.2% will rise steadily this year. COVID-19 has slowed its digital services business, offset by strong demand for its core cloud and 5G portfolio. With significant gains from Level 1 customers, investors can count on management for sustained revenue growth in 2021.
In contrast, Nokia’s performance in 5G sales is uneven. A new management team could reduce the inconsistencies in the company’s results. But we won’t know when that might happen. If the next report is as strong as last quarter’s numbers, Nokia could follow Ericsson and trade at its 52 week highs.
Lower losses in digital services helped push Ericsson’s operating margin to 8.2%. This figure is lower than Nokia’s operating margin forecasts for 2020 by 9%. But after a shutdown of Edge Gravity and a restructuring charge of 700 million SEC (US $ 77.4 million), Ericsson’s profits are expected to improve. It has already increased gross margins for nine consecutive quarters.
The commercial success of 5G in China will support the company’s goal of establishing itself as a market leader in 5G. Even with COVID-19, CEO Ekholm is convinced of the macro-forces in the industry.
Markets may renew concerns over Ericsson’s 5G equipment containing components from a company closely linked to the Chinese military.
Alexander Peterc of Societe Generale asked:
“If you could give us some idea of how much time you are taking, you think, I mean your informed opinion, to remove Huawei kits from European networks where exchanges will be needed and whether that will cause delays in 5G deployments in the short term. especially in Europe. ”
The CEO replied:
“When we – our guiding principle is to be transparent. And when we take very high costs that are the subject of a decision, we believe that it is appropriate to talk about and describe it to the market. those where we had a very high cost. ”
So if Ericsson has addressed the associated costs, the markets should focus on the upcoming 5G market share growth opportunities.
Fair value and your take out
Ericsson shares are approaching a period of seasonal weakness. Even though the stock turned the tide this year, the stock historically fell the most in August and October:
Graphic courtesy of Stock Rover Research
Few analysts propose a price target. The two analysts’ average price target is $ 11.20 (according to TipRanks). Alexander Duval of Goldman Sachs reiterated a “buy” and issued a price target of $ 12.40.
Value investors, especially DIY enthusiasts, will not want to sue Ericsson after the stock rose about 16% last week. Nokia is also convincing because the stock is still above key moving averages despite a strong liquidation at the start of the month.
After Ericsson’s strong earnings report and positive response, investors are expected to get the company back on the buy list.
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Disclosure: I am / we are long NOK. I wrote this article myself and it expresses my own opinions. I am not receiving any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose action is mentioned in this article.