Ericsson Stock: Buy For 15% Gains

Up almost 2x from its low in March 2020, at the current price of around $13 per share, we believe Ericsson stock (NASDAQ: ERIC) has further upside potential. The stock has risen from $7 to $13 off its March 2020 bottom, a little more than the S&P which increased by over 80% from its low. Further, the stock is up around 45% from the level it was at before the pandemic. However, we believe that Ericsson stock could rise around 15% to regain its early-2021 high of around $15, driven by expectations of continuing demand growth and steady Q1 2021 results. Our dashboard What Factors Drove 53% Change In Ericsson Stock Between 2018 And Now? has the underlying numbers behind our thinking.

The stock price rise since late-2018 came due to a 16% rise in revenue from $24.3 billion in FY 2018 to $28.2 billion in FY 2020. Combined with a roughly unchanged outstanding share count, RPS (revenue-per-share) rose around 1.15x from $7.38 in FY 2018 to $8.49 in FY 2020.

Ericsson’s P/S (price-to-sales) multiple jumped from 1.18x in 2018 to 1.41x by 2020 end, and has since risen further to 1.57x currently, riding the rally in technology stocks. We believe that the company’s P/S ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns in early 2020 affected device demand, but the continued global roll-out of 5G has benefited Ericsson. This is evident from Ericsson’s full-year 2020 earnings, where revenue came in at $28.2 billion, up from $24 billion in FY 2019. As operating expenses did not rise at the same rate, EPS jumped from $0.09 to $0.63. Further, the latest Q1 2021 earnings report saw revenue come in unchanged from the same period last year, but the company was able to control operating expenses, and this saw net income jump to $380 million from $270 million over this period.

Additionally, with the lockdowns being lifted globally and manufacturing activities stepping up to pre-pandemic levels, we believe the company will continue to see steady revenue and margin growth in the medium term. These factors will raise investor expectations further, driving up the company’s P/S multiple. We believe that Ericsson stock can rise around 15% from current levels, to regain its 2021-high of $15.

While Ericsson Incorporated stock may be undervalued, it is helpful to know how its peers stack up. Ericsson Stock Comparison With Peers summarizes how Ericsson compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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