The good times are starting to roll at Ericsson (ERIC).
Yesterday, the Swedish company reported first-quarter earnings that topped analyst estimates, and also stated that it was gaining market share in the worldwide 5G market.
In particular, Ericsson is expanding its global footprint at the expense of its largest rival, Huawei Technologies Co. That’s just what I anticipated when I first recommended Ericsson January 2022 $10 call options last September:
[Huawei] has become a corporate pariah in the United States because of its alleged spying activities on behalf of the Chinese government. Federal authorities feared Huawei was functioning as a kind of Trojan horse for Chinese intelligence.
Therefore, various U.S. government entities have taken decisive steps to halt Huawei’s expansion within the U.S. telecommunications network… especially the 5G portion of that network.
Many overseas governments and corporations have followed suit. Therefore, as Huawei loses both prestige and contracts, Ericsson is gaining both.
Finland’s Nokia Corp. (NOK) has also gained the opportunity to feed at the trough of Huawei’s lost business. In countries that have restricted or banned commerce with Huawei, Ericsson and Nokia have become the go-to replacement vendors.
But so far, Ericsson has capitalized on this opportunity better than Nokia and consolidated its position as the market leader in 5G with 136 commercial contracts and 85 live networks in 42 countries.
During the first quarter, Ericsson generated double-digit revenue growth in three of the five geographic regions in which it operates. Sales increased 15% in Europe, 20% in Southeast Asia, and a whopping 80% in Northeast Asia. But Latin America delivered flattish results, while sales in the Middle East and Africa slumped 16%.
Looking ahead, CEO Börje Ekholm says his team is “very optimistic” about the second quarter. As he stated on the earnings conference call (emphasis mine):
There is strong momentum in the global 5G demand with lead markets moving forward at high pace, creating opportunities for us to grow our core business…
We’re convinced here that the 5G cycle is going to be a different cycle than the traditional or more, call it, consumer-driven cycle that we’ve seen in the past. And we believe the 5G cycle will be both longer and bigger due to entering a complete new application area with enterprise applications.
That statement underscores a key part of the rationale for investing in Ericsson. Assuming the 5G cycle will in fact “be both longer and bigger” than previous upgrade cycles, Ericsson is approaching a long runway of potential profit growth, as are many other players in the 5G sector.
However, Ekholm made it clear that he does not plan to simply ride the strong current of 5G industry growth; he intends to grab market share as well, and to do so with consistently high profit margins.
Ekholm again:
[We have] created a strong platform to grow in our core business, networks, digital services, and managed services, but it also creates an opportunity to accelerate our enterprise applications business and developing new – new solutions for enterprise…
[But] what we see driving of our growth primarily [will be] share gains… [W]e have made substantial gains in market share that started a few years back and actually have continued during the first quarter. And we will not stop at that.
Wall Street analysts seem to believe him, as consensus earnings estimates are moving steadily higher, both for this year and next.
Per-share earnings estimates for this year now cluster around $0.70 and around $0.82 next year. Both estimates are about 15% higher than they were six months ago.
Thanks to the company’s demonstrable recent successes, the option I recommended is up more than 100% so far. But I expect this trade to deliver even greater gains over the coming months.
The Ericsson January 2022 $10 call options remain a solid “Hold.”
Regards,
Eric Fry
The Speculator
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