Ericsson Plagued With Headwinds: Should You Sell The Stock?
Zacks Investment Research | Dec 06, 2016 08:24PM ET
Telefonaktiebolaget LM Ericsson (ST:ERICAs) (publ) (NASDAQ:ERIC) has been grappling with numerous headwinds in recent times and its share price trend reflects the same. Year to date, the company’s shares have plunged 43.2%, significantly underperforming the Zacks categorized Telecommunications Equipment industry average negative return of 2%.
Further, the company’s earnings estimates also moved south over the past couple of months. Ericsson has seen five downward estimate revisions compared with none upward, in the past 60 days. This has led the Zacks Consensus Estimate for 2016 earnings to go from 57 cents to 34 cents during the same time period, which indicates decidedly bearish analyst sentiment for the stock.
Declining mobile broadband demand, persistent softness in emerging markets and slow progress of cost-cutting efforts have been plaguing Ericsson’s results. Further, softness in broader macroeconomic conditions and slow MBB spending have cast further pressure on its operations.
The impact of these issues can be clearly seen in the company’s recent quarterly results. Ericsson has had a dismal earnings track record in recent times, characterized by three consecutive earnings misses in the four trailing quarters, for an average earnings miss of 23%.
However, 2017 could be a turnaround year for Ericsson, as its cost-savings program turn meaningfully productive and end-market demand rebounds. We believe that Ericsson’s recent partnership with Cisco Systems Inc. (NASDAQ:CSCO) will boost its product line up and drive sales growth.
The company is also steadily fortifying its 5G foothold to benefit from the commercial launch of the technology and foresees bright prospects in the IoT domain with 5G commercialization in 2020.
In fact, Ericsson expects Virtual Reality ("VR") and Artificial Intelligence ("AI") applications to flourish in the times to come. A recent survey report (the sixth edition of Ericsson’s annual trend report: The 10 Hot Consumer Trends for 2017 and beyond) hints at similar trends.
The report suggests that virtual reality will be indistinguishable from physical reality in only three years and consumers see AI playing a much more prominent role than before in both society and at work. Further, consumers are increasingly using automated applications, encouraging IoT adoption. Consumer demand also seems to imply that demand for battery-friendly, instant and fast connectivity is set to grow rapidly. In that sense, it indicates a robust need for 5G networks.
Ericsson has been focusing on 5G system development and has undertaken many notable endeavors. Meanwhile, the impending deployment of 5G networks in 2020 is expected to boost the adoption of IoT devices, with technologies like network slicing gaining more prominence. Ericsson, being one of the premier telecom services providers, is well set to capitalize on the demand as operators expand network coverage and upgrade networks for higher speed and capacity.
However, Ericsson is, at present, struggling with slumping demand in Russia and Brazil, and accelerating negative industry trends have further compounded its problems. The company’s mobile broadband sales continue to take a grave beating from adverse industry trends as well as sluggish growth in countries like Brazil, Russia and the Middle East. Further, the company is facing stiff competition from Huawei Technologies Co. and Nokia (HE:NOKIA) Corp. (NYSE:NOK) .
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