Ericsson Stock Forecast: The Headwind of Huawei Is A Tailwind For Ericsson

motek 1The Ericsson stock forecast article was written by Motek Moyen Research Seeking Alpha’s #1 Writer on Long Ideas and #2 in Technology – Senior Analyst at I Know First.

Summary

  • Ericsson’s stock has a price return of 32% since my last buy recommendation. I’m again reiterating this 5G networking-centric stock as a buy.
  • The new U.S. sanctions are a strong headwind for Huawei. Huawei’s problems are to the benefit of Ericsson’s 5G infrastructure deployment business.
  • Huawei’s affordable 5G hardware and software solutions will lose current and future customers due to U.S. government’s threat of severe punishments against Huawei/ZTE equipment buyers.
  • Proof of the ostracization of Huawei is that German firm Deutsche Telekom and Bell Canada has chosen Ericsson for their high-profile 5G infrastructure deployment contracts.
  • Ericsson will only have to contend with Nokia with it comes to 5G deployment on non-China markets. Less competition is always welcome.

I correctly predicted three years ago that Ericsson’s (ERIC) divestment of underperforming subsidiaries can lead to better performance. The return since that ERIC stock forecast buy recommendation is +32%. You can take your profits now or you can hold/buy more ERIC. This 5G-boosted company has a big tailwind from the new U.S. sanctions against Huawei. These recent sanctions prohibit US/international companies from buying or using US-sourced hardware and software components that can be used in manufacturing/production of any Huawei’s products.

These new very harsh sanctions are likely why ERIC has a 1-month price return of +15.90%. Ericsson is going to benefit a lot from Huawei’s political-driven ostracization.

ericsson stock forecast
(Source: Seeking Alpha Premium)

The chart above also indicates that Seeking Alpha authors, Wall Street analysts, and the Quant Rating system of Seeking Alpha are all bullish on ERIC. It is therefore judicious for us to buy more ERIC right now. Huawei’s long-term headwind from U.S. sanctions benefit non-Chinese 5G infrastructure/telecom equipment vendors like Ericsson.

Fear over the U.S. government taking punitive actions against companies who patronize Huawei products is likely why Deutsche Telekom and Bell Canada dropped Huawei and instead chose Ericsson for their 5G network deployment contracts.

Going forward, the current COVID-19 pandemic will not be able to stop the coming 5G revolution. On the contrary, telecom fixed and wireless communications companies around the world will have to fast-track their 5G infrastructure rollout. The new work-from-home and learn-from-home new normal means billions of people need faster internet connectivity.

Without Huawei competing against it in international market, Ericsson is now poised to vastly improve its poor -0.51% 5-year revenue CAGR. ERIC is a buy right now because the ostracization of Huawei can help Ericsson achieve a forward 5-year revenue CAGR of 7-12%. My fearless forecast is that even if Trump loses his re-election bid come November, the U.S. government will continue its anti-Huawei punitive sanctions.

ericsson stock forecast growth
(Source: Seeking Alpha Premium)

Due to its poor sales performance, ERIC is still affordable to own. Its current price of $9.62 compelled Seeking Alpha’s quantitative AI to give ERIC a B+ grade on its Value metric. My assessment is that ERIC remains a wise buy whenever it trades below $13.

ericsson stock forecast - value
(Source: Seeking Alpha Premium)

Why Huawei’s Problem Is Ericsson’s Tailwind

The ostracization of Huawei in international markets is an important development. Huawei rose quickly to become the world’s top telecom equipment vendor at the expense of Ericsson and Nokia (NOK). The chart below illustrates just how fast Huawei took market share away from Eric and Nokia.

ericsson stock forecast

The 5G network infrastructure deployment business is a hyper-growth industry with a CAGR of 67.1%. By 2027, This niche market will be worth $47.77 billion/year.

ericsson stock forecast -5g
(Source: Markets and Markets Research)

Without competition from Huawei, Ericsson can significantly improve on its current annual revenue of $24.26 billion. It is even possible that 2020 will see Ericsson achieving annual revenue of $26.5 billion. For 2021, I expect Ericsson to gross $28.5 billion, and 2022 would be $31.5 billion. Investors should bet on ERIC because this company has long-term benefits from Huawei’s ostracization outside of China.

The 5G infrastructure opportunities in Europe and North America are actually bigger than it is in China. Ericsson can afford to get out of China and just focus on 5G network contracts for telecom companies located in Europe and North America. Nokia quit China’s 5G infrastructure business because it is unprofitable competing against Huawei and ZTE.

ericsson stock forecast-5g revenue growth
(Source: Markets and Markets Research)

Conclusion

Ericsson only needs to deliver improved annual sales to gain more support for its stock. Better annual sales eventually lead to greater profitability. Greater profitability will help Ericsson allocate more for research and development. More profits will also allow Ericsson to gradually increase its dividend payments. Competition from Huawei and ZTE is why Ericsson has a poor TTM net margin of 0.90%.

profitability
(Source: Seeking Alpha Premium)

Going forward, the ostracization of Huawei and ZTE in non-China 5G contracts will eventually lead to better profitability for Ericsson. ERIC will no longer have to go toe to toe against Huawei’s dirt-cheap 5G and network gears in North America, Europe, Latin America, Africa, and Asia. The headwind of Huawei is now why I have a $12 one-year price target for Ericsson’s stock. This is notably higher than the $10.50 average price target of Tipranks-tracked Wall Street analysts.

(Source: TipRanks)

My buy rating is supported by the slightly-bullish one-year Ericsson stock forecast score from I Know First.

ericsson stock forecast

Technical traders should also exploit the buy signals for ERIC’s monthly indicators and moving averages trends.

(Source: Investing.com)

Past I Know First Success with Ericsson Stock Forecast

I Know First gave bullish Ericsson stock forecast in the past. On February 9, 2020, the I Know First algorithm issued a bullish 3-day forecast for ERIC with a signal of 0.84 and a predictability of 0.12, the algorithm successfully forecasted the movement of the ERIC share.  After 3 days, Eric shares rose by 5.02% in line with the I Know First algorithm’s forecast. See chart below.

past forecast
past result

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