Telecom equipment play Ericsson (ERIC) has been a solid performer over the past year. Last March, when markets tanked due to the outbreak of COVID-19, shares recovered in just a few months.
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As the 5G rollout helped to boost demand, the stock continued to climb. Now, after the stock soared from around $8 per share last April to around $13 per share today, can investors expect even higher prices ahead?
Nothing is set in stone, but a price rise is definitely attainable. Ericsson continues to leave European rival Nokia (NOK) in the dust when it comes to 5G contract wins. Additionally, while China-backed Huawei is a formidable rival, geopolitics give this Swedish company another boost.
In addition to its still-reasonable valuation, there’s reason to believe that investors may find opportunity here.
ERIC Stock Shows 5G-Fueled Growth
Ericsson is crushing it, as indicated by its strong financial results in the preceding quarters. Its strength mostly lies in its success in locking down 5G equipment contracts with end users all around the globe.
Those contracts haven’t all been in Western markets like North America and Europe. As of late, Ericsson has also inked deals in Asian markets, including China.
In short, you could say the company is sitting in a highly advantageous position. Geopolitical considerations surrounding competitor Huawei pave the way for Ericsson to win a lion’s share of the 5G equipment market. (See Ericsson stock analysis on TipRanks)
Still Sporting a More-than-Fair Valuation
It would be expected that Ericsson’s recent results and near-term potential are already fully factored into its stock price. Instead, even after its steep climb over the past year, shares remain more than reasonably priced.
At today’s prices, ERIC stock trades at around 17.9x projected 2021 earnings. To some extent, this valuation reflects the high probability of slowing growth in the coming year. Its top line grew by double-digits in 2020, but analysts are calling for mid-single digit revenue gains in 2021.
At the same time, while sales growth may pale in comparison to last year, the pivot to 5G has resulted in margin improvements. As a result, the company is set to grow its earnings per share (EPS), from 73 cents in 2021 to 86 cents in 2022.
That said, with its advantageous position in the 5G supplier market, ERIC stands a good chance of hitting the top end of projections.
Analysts Weigh In
According to TipRanks’ analyst rating consensus, ERIC stock comes in as a Strong Buy. Out of 4 analysts covering the stock, all 4 rate it a Buy.
As for price targets, the average analyst price target on ERIC stock today is $17 per share, implying around 27.9% upside potential.
Bottom Line
Making the right moves ahead of the 5G revolution, this company has reaped the benefits, as shown by the strong improvements in its 2020 operating results.
Growth in the coming years may come at a slower pace, but don’t expect the trends backing it to end anytime soon. Able to handily beat European rival Nokia and boosted by the geopolitical considerations surrounding Huawei, Ericsson stands to live up to, and possibly exceed, analyst expectations.
Nevertheless, with more gains likely to come, ERIC stock remains a 5G solid play.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
