Ericsson is facing the limitation of hope

<p>For the past six months, the story of Ericsson (NASDAQ: ERIC) has been about what “should” happen. And what will happen is ERIC shares that benefit from the launch of 5G technology.

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In fact, the US government actively lobbied to prevent foreign countries from participating in Chinese competitor Huawei. It all seems in line with Ericsson’s benefit.

But if the company gets a lift from 5G, you would not be able to tell from the company’s stock price. The ERIC share will decrease by more than 1% by 2020. It also approaches the share’s earnings over the past 12 months.

Bullish Case for ERIC bearings

Analysts are happy with the profitability of Ericsson’s network and digital services. This unit of Ericsson incurred restructuring costs and heavy losses in 2017 and 2018. The company reported a net profit of $ 195 million with a net margin of less than 1%.

Ericsson has over 75 commercial 5G agreements and 24 live 5G networks. Ericsson’s strong growth potential in the 5G business in North America, analysts believe that the company’s shares are undervalued.

And although Ericsson reported disappointing results at the end of January, analysts seem unpleasant. Citi analyst Amit Harchandani said he expects the company’s consensus 2020 earnings before interest and tax expectations to be 5 to 10% lower due to higher operating costs.

While a weaker quarter was generally expected … we would be buyers of any lasting weakness as we see several reasons for optimism beyond the headlines.

But instead of rising, the stock quickly fell about 5%. Since then, it has recovered all these losses and briefly turned positive for the year. However, it would turn out to be short-lived.

One of the reasons the stock fell, Ericsson’s leading competitors, Nokia (NYSE: NOK), changed its performance guidance for 2020 lower. Although this is unfortunately a fairly common occurrence for Nokia, it points out the reality of the emerging 5G trend. The companies competing in 5G will have to spend a lot of money.

And in the short term, this means that they will have a hard time generating significant profits. This makes it difficult to see the shares increase significantly.

Ericsson has a hard time defending their home ground

The United States actively lobbied Britain to prevent Huawei from expanding the country’s 5G infrastructure. Despite this pressure, the UK announced in late January that it would allow Huawei to participate in building the country’s infrastructure with restrictions.

The bad news for Ericsson did not end there. European Union (EU) countries followed suit by involving Huawei. Both Ericsson and Nokia are headquartered in Europe. Undoubtedly, the companies hoped that Huawei would be subject to a ban in European countries.

Ericsson’s CEO tried to dispel all perceptions that Ericsson was behind in 5G. Speaking to reporters at the World Economic Forum in Davos, Switzerland, Ericsson’s CEO Borje Ekholm said he saw “no one ahead of us (Ericsson)” in 5G technology. Ekholm further said that Ericsson’s equipment was the first to be used in North America and Europe.

Do not hit the chart

Analysts hold high ERIC shares. The consensus rating from 13 analysts is a “buy”. And the stock has a 12-month price target of $ 10.27, almost 20% more than the current level. But my concern is that analysts have been taking advantage of ERIC stocks for a while now. And the stock continues to be in a tight range.

And that means that no matter what you think will happen to Ericsson’s stock, you need to pay attention to the chart. No matter what the analysts say, the proof for Ericsson will be in the profit or the lack of them.

At the time of writing, Chris Markoch had no position in any of the above securities.