Morningstar | Ericsson Ready for 5G Growth After a Commendable Turnaround
Ericsson is a leading provider of hardware, software, and services to communication service providers. The company is off to a good start in 5G, in our view, as 5G infrastructure spending was pulled into 2018 as major carriers announced their generational upgrade intentions. 5G may have a longer spending period than previous wireless iterations, and we believe Ericsson's robust portfolio of hardware and software coupled with its industry leading services business has it primed to take advantage of 5G network demand.The company has been on a turnaround mission after its 2015 apex. We believe that Ericsson is making wise strategic efforts and we applaud management's prudent outlook after slashing its cost of goods and operating expenses while committing to exit or renegotiate unfavorable contracts. We believe the management team has properly focused the company on invigorating networking innovation while honing operational efficiency.That said, we do not believe the CSP equipment provider industry lends itself to economic moats because CSPs multisource vendors and flex pricing power by pitting suppliers against each other. However, we expect Ericsson's restructuring and strategic efforts, combined with 5G demand, to create top-line and operating margin expansion. We believe that Ericsson's efforts within software-defined networking will be fruitful as software becomes essential in a 5G world. Our expectation is for Ericsson to gain from 5G networks requiring small-cell antenna sites to propagate the fastest transmission bands. Ericsson should profit from 5G networks creating more product use cases such as "Internet of Things" devices within cars and factories. Based on our view that network complexity will increase as firms control and monitor a rapidly growing quantity of Internet of Things devices, our expectation is for Ericsson's software and services to be in high demand. The company also creates revenue from licensing patents that are essential in the production of 5G smartphones (as well as previous generations). We believe Ericsson may find licensing opportunities in nonhandset markets, and that licensing revenue will help bolster operating results.Ericsson provides communications technology and services. Co.'s services, software and infrastructure – especially in mobility, broadband and the cloud – enable the telecom industry and other sectors to do business, increase efficiency, improve the user experience and capture new opportunities. Co. has more than 110,000 professionals and customers in more than 180 countries. Co. provides support for networks with more than 2.5 billion subscribers. Co.'s core business areas are called Radio, Core and Transmission and Telecom Services. Co. divides its operations into three business segments: Networks, Global Services and Support Solutions.
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