Ericsson stock (NASDAQ
NDAQ
: ERIC) has underperformed this year, remaining roughly flat year-to-date compared to the broader S&P 500 which gained about 7% over the same period. Ericsson posted a weaker-than-expected set of Q4 2022 results with profits for the quarter declining by about 39% versus last year to 6.07 billion Swedish kronor (about $588 million). Moreover, the company has warned that its margins could cool as it was seeing slower demand from the United States and other developed markets – as carriers pare back a bit on 5G related infrastructure spending partly due to high levels of existing inventory. Although markets such as India are growing quickly, Ericsson has indicated that this was unlikely to offset headwinds in developed markets. The company also projected that it expects its EBITDA for Q1 2023 to be a bit lower than the last year due to this, although it expects to see an improvement during the rest of the year.
So is Ericsson stock a buy at current levels of about $5.80 per share? Ericsson’s valuation appears relatively reasonable, with the stock trading at about 10x consensus 2023 earnings and about 8x consensus 2024 earnings. Now although near-term revenue growth is likely to be elusive, the telecom industry at large is still in the early stages of the 5G rollout and there remains a reasonably long runway, especially in emerging markets. This could drive demand for Ericsson’s products and services. Moreover, Ericsson is also looking to bolster its profitability via cost cuts. The company intends to lay off about 8,500 workers or about 8% of its total workforce starting from the first half of 2023. The company is targeting run-rate cost reductions to the tune of 9 billion Swedish kronor (about $860 million), by the end of this year. We value Ericsson stock at about $6.35 per share, marginally ahead of the current market price. See our analysis on Ericsson Valuation: Expensive or Cheap for more details on what’s driving our price estimate for the stock. Also see our analysis of Ericsson Revenues for more details on Ericsson’s key revenue streams.
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