Ericsson Surpasses Expectations in Q3 2024; Stock Rises 34% This Year

Ericsson stock (NASDAQ: ERIC) has surged approximately 34% in 2024, outpacing major market indices. In its third-quarter report, the company announced sales of SEK 61.8 billion, marking a slight 1% decrease year-over-year. A standout performance in North America saw sales increase by 55%, though this was countered by downturns in other significant regions. Importantly, Ericsson’s margins improved, with adjusted gross margins climbing to 46.3% from 39.2% a year ago, driven by a greater share of sales from the high-value U.S. market. The company’s Q3 results benefited from retroactive intellectual property rights (IPR) licensing and a customer settlement, which contributed positively to the gross margin in its Networks division.

Strong Financials Underpin Strategic Advances

Adjusted EBITDA reached SEK 7.8 billion, showcasing a 12.6% margin, thanks to cost-cutting measures. Net income rose significantly to SEK 3.9 billion, rebounding from a loss of SEK 30.5 billion in the prior year, with diluted earnings per share (EPS) at SEK 1.14. Free cash flow before mergers and acquisitions was robust at SEK 12.9 billion, underscoring effective inventory management. The third-quarter report indicates notable progress in implementing strategic and operational goals, driven by advancements in programmable networks and mobile network agreements across various markets. For those seeking steadier returns rather than the volatility of individual stocks, the High Quality Portfolio, boasting greater than 91% returns since inception, may be worth considering.

Strategic Developments Drive Future Growth

A significant highlight from the quarter was the formation of a strategic joint venture with leading mobile network operators, securing a reliable global supply of Network APIs. Additionally, Ericsson expanded its 5G patent licensing portfolio through new agreements, with projected IPR revenues anticipated to exceed SEK 13 billion in 2024.

Stock Performance Compared to Peers

The stock has trailed behind market averages for the past three years, posting returns of -7% in 2021, -44% in 2022, and only 13% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, comprising 30 diversified stocks, exhibited less volatility and consistently outperformed the S&P 500 during this period. This discrepancy in returns illustrates that HQ Portfolio stocks provide better returns with reduced risk compared to the broader market.

Revenue Forecast and Valuation Adjustments

Looking ahead, we forecast Ericsson’s revenues to hit $24.8 billion in the fiscal year 2024, remaining flat year-over-year. Given our forecasts for revenue and EPS, we have updated Ericsson’s Valuation to approximately $8 per share, based on an expected EPS of $0.50 and a price-to-earnings (P/E) multiple of 15.3x for the upcoming fiscal year. The stock appears to be appropriately valued at its current price as of December 30.

Anticipating Challenges in Q4 Sales

Looking ahead to the fourth quarter, Ericsson’s sales outlook is mixed. The solid performance in the Networks segment raises expectations for lower-than-average seasonality. In the Cloud Software and Services sector, a 1% sequential decline from Q2 to Q3 is expected to continue, along with below-average sales in Q4 due to project delivery timing. Furthermore, the Enterprise segment may experience additional sales pressure as the company focuses strategically on more profitable markets and products. Profitability is projected to maintain a gross margin between 47% and 49% in Q4, with anticipated full-year restructuring costs around SEK 4 billion.

Peer Comparisons Offer Insight

Comparing Ericsson with its peers can provide valuable insights. Explore how ERIC’s Peers perform across critical metrics and discover more comparisons across various industries in our Peer Comparisons section.

[1] Returns as of 12/30/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.