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About Ericsson and why people are investing in it

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There are quite a lot of companies to invest in. If you’re thinking about putting your money in stocks, telecommunications is something you should look into. Why? Just imagine being able to live in the future where it doesn’t have just 4G network, but up to 5,6,7G network. With technology, anything is possible to innovate and it’s something telecommunications companies possess.

Let’s talk about Ericsson--a publicly listed company currently attracting investors because of its expansion plans. What makes people decide to invest in Ericsson stock? Is it something worth considering? Let’s see.

About Ericsson 

Together with its subsidiaries, Telefonaktiebolaget LM Ericsson (publ) offers communication networks, facilities, and software products to telecommunications and other industries.

Networks, Digital Services, Managed Services, and Emerging Business and Other are the company's four divisions.

COPYRIGHT_WI: Published on https://washingtonindependent.com/ebv/about-ericsson-and-why-people-are-investing-in-it/ by Frazer Pugh on 2021-05-25T01:16:49.542Z

The Networks section provides radio access and transport hardware, software, and ancillary activities, as well as architecture, tuning, network deployment, and customer support.

In the aspects of business support networks, operations support systems, cloud core, cloud communication, and cloud infrastructure, as well as consultancy, learning, and testing services, the Digital Services division offers products and services for operators.

Operators may use the Managed Services division for network and IT management, network design and development, and application creation and maintenance. Emerging businesses such as the Internet of Things, iconectiv, Cradlepoint, which offers wireless edge WAN 4G and 5G enterprise solutions, and Red Bee Media, MediaKind, and other new businesses make up the Emerging Business and another segment.

The company has operations in North America, Europe, and Latin America, as well as the Middle East and Africa, South East Asia, Oceania, India, and North-East Asia. This Swedish telecommunications company, Telefonaktiebolaget LM Ericsson (publ), was established in 1876 and is based in Stockholm.

Ericsson’s Performance In The Past Months 

Ericsson posted disappointing first-quarter 2021 results, with both the top and bottom lines missing the Zacks Consensus Estimate

In the March quarter, net income was SEK 3,187 million ($379.5 million), or SEK 0.96 (12 cents) per share, up from SEK 2,156 million or SEK 0.65 per share the previous quarter. Stronger EBIT was the primary driver of the change. The bottom line, on the other hand, fell 1 cent short of the Zacks Consensus Estimate.

On the other side of the news, with a 5G-ready virtual workspace service designed to meet the needs of more than 6 million businesses, Ericsson is aiming for a USD 90 billion small and medium business (SMB) market in the U.S. Ericsson Wireless Office eliminates the need for in-house IT expertise, physical installations, and computers by providing dependable and safe network connectivity from anywhere at any time. The embedded security system provides a safe remote access service that enables companies to protect their apps from online threats while retaining access control and governance over their contractors, associates, suppliers, and employees.

What's The Big Deal With Ericsson?

So, what’s keeping Ericsson stock hot in the eyes of investors?

Market Expansion

The company's sales growth would be supported by its continued market share expansion. Despite the fact that its customers prefer vendor diversity, Ericsson's solutions have lower operating costs and, as a result, a lower overall cost of ownership.

The organization is positioning itself for potential software sales growth by adopting Open RAN (O-RAN). In the period 2021-22, according to CEO Ekholm, O-RAN will not add to the bottom line. Nonetheless, it will benefit the company's business model. And, as is customary in the telecommunications industry, when the technology changes, Ericsson will seize the O-RAN opportunity.

R&D Investment

Investing further in R & D would help the company expand its product range. The company's legacy portfolio, on the other hand, is declining faster than expected. Overall, as sales volume falls short of expectations, the short-term output can suffer. Software sales will have a greater effect on earnings in the coming quarters. This indicates that Ericsson's stock will maintain its upward trend that started in March.

Ericsson agreed to increase its R & D activities in 2017 in order to build a sustainable 5G portfolio and raise its margins. To that end, it increased its research and development budget from 32 billion Swedish kronor ($3.8 billion) in 2017 to 40 billion kronor ($4.8 billion) in 2020.

The strategy appears to be working. Revenue rose 5% year over year (or 13% adjusted for equivalent units and currency) to $69.6 billion kronurs or $8.3 billion equivalent in the fourth quarter, and the company's gross margin grew to 40.6 percent, up from 36.8 percent the year before. The operating margin rose to 12.5 percent in 2020, 2 years ahead of the goal range of 12 percent to 14 percent set for 2022.

Is Ericsson Worth Considering?

Maybe you’re looking at it now as a potential stock investment. Looking ahead, the business is still exposed to the 5G market's secular and spectacular growth. The network 5G market is expected to expand at a compound annual growth rate of 67.1 percent to $47.8 billion by 2027, according to MarketsandMarkets.Management expects the company's markets to expand in the small percent range over the next couple of years, despite the decline of legacy wireless communication technologies.

It anticipates sales growth of more than 1% in the medium term, with a net income margin of 9 percent to 12 percent. Those expectations seem conservative, given the company's latest good success and expanding the 5G market.

In any case, based on 2020 sales of 232.4 billion kronor ($27.6 billion) and a long-term cautious projected net income margin of 9%, free cash flow should surpass 21 billion kronor ($2.5 billion) and rise from there, far exceeding the estimated dividends cash outflow of 6.7 billion kronor ($0.8 billion) in 2021.

As a result, even if Ericsson's results come in at the low end of management's cautious forecast, there's still potential for the business to double its dividend while maintaining its investment and maintaining its balance sheet safe in the long run.

The stock price of Ericsson rose by 60% in a year as a result of the company's good success in recent quarters. It is now priced at a forward price-to-earnings ratio of 15, which seems reasonable considering management's long-term sales growth outlook in the low single digits.

Dividend investors, on the other hand, should find 5G stocks as a viable option for a secure and growing payout. The planned 33 percent dividend increase would raise the dividend yield from 1.4 percent to 1.9 percent, which is becoming more appealing given the possibility of future higher payouts.

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About The Authors

Frazer Pugh

Frazer Pugh - I work in the investment management sector as a professional. Previously, I advised top financial services companies on balance sheet management, portfolio planning, and valuations as a consultant. I am currently pursuing a part-time MBA at Melbourne University, where I am a lecturer in accounting and hedge fund strategies, as well as a mentor/coach in a part-time equity analysis initiative. I have a bachelor's degree in economics, a master's degree in finance, and am a Chartered Accountant. I enjoy instructing and assisting others in achieving their objectives.

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