Swedish telecommunication equipment and services company Ericsson (NASDAQ: ERIC) has been at the forefront of 5G hardware development for some time now, but its latest earnings suggest that it may be less cost-effective than initially thought.
Ericsson’s U.S. woes
Ericsson’s showing in its recent Q4 earnings report was less than impressive for investors who expected big things following the increased rollout of 5G in 2019. Despite being “seasonally its best” quarter, the company claims it has been hit by a slowdown in its U.S. business and higher costs. Earnings rose to 5.7 billion Swedish crowns ($600.19 million) from 2.6 billion a year earlier but were down from 7.4 billion in the previous quarter.
However, the report does not tell the whole story as the company is arguably the best option at a 5G future stock at the moment. The costs of this are not cheap though. Though seemingly disappointing, the numbers show a shrewd investment by the company to guarantee success in the long-term. By spending heavily on its 5G network in 2019, it now boasts 78 commercial 5G agreements with unique operators and 24 live 5G networks on four continents.
CEO Borje Ekholm said Ericsson was still on track to deliver on its 2020 targets of operating margins exceeding 10% and sales of between 230 – 240 billion Swedish crowns.
What is 5G worth?
According to analysts, the 5G network market will be worth $165 billion by 2025 with a CAGR of 32.1%. This represents a massive opportunity for Ericsson, which has set itself up as a market leader. Despite increased competition from the likes of Huawei, Qualcomm (NASDAQ: QCOM), and Cisco (NASDAQ: CSCO) in recent years, Ericsson’s global market share has actually increased from 33% to 43% over the past decade.
To put this into perspective, should the 5G network continue growing at its current rate, and should Ericsson maintain its current market share, it could generate $70 billion in revenue from the $165 billion market.
Of course, these are some big ‘ifs’, but there is no denying the worth of the company’s 5G investments.
How is Ericsson’s rollout doing?
Ericsson has been conducting field operations and trials of its 5G network for years now, working with partners such as Verizon (NYSE: VZ), AT&T Inc. (NYSE: T), China Mobile Ltd. (NYSE: CHL) and South Korea’s SK Telecom Company Ltd. (NYSE: SKM). Before launch, Ericsson’s prototype 5G radio had already done extensive testing in the U.S., South Korea, Japan, and Sweden, turning it into a cutting edge technology with an edge over the competition.
However, this was all very expensive work, resulting in lower profits in recent years. Ericsson has lost $1.7 billion in total revenue since 2016 at an average annual rate of 3.3% mainly due to losses across its core segments, as focus shifted to 5G.
The company’s recent acquisition of Kathrein Mobile Communications antenna also sets it up nicely to improve coverage globally, even if the purchase does weigh on margins and sales targets for 2020.
In short, Ericsson may not look like it is making lucrative amounts of money, but in the long run, it is at the forefront of one of history’s greatest telecommunication shifts and looks ready to become a leader.
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