Ericsson Crushed Earnings Expectations. It Has Become a Highly Profitable 5G Player.

The back story. The telecommunications sector has been largely insulated from the impacts of the Covid-19 pandemic. Millions of people housebound and working from home through lockdowns have kept demand for services high.

The pandemic did delay what many investors had expected to be a 5G “supercycle”—massive growth in stocks exposed to the next generation of mobile internet technology.

But developments in 5G did come on a political front, with a number of new countries, including Sweden, banning Ericsson’s Chinese rival Huawei from 5G networks on national security grounds.

5G contracts in China are important to Ericsson, with the company specifically citing growth in China as a source of profitability in the third quarter of the year.

Also read:Momentum in 5G Is Dialing Up in 2021. These Stocks Are Set for the Best Reception.

What’s new. Ericsson reported on Friday operating income of 11 billion Swedish crowns ($1.32 billion) for the final three months of 2020, crushing expectations of around 8.7 billion crowns. A strong fourth quarter brought operating income for the full year to 27.8 billion crowns, a 163% increase from 10.6 billion crowns in 2019.

The company’s improvement in operating margins and acceleration of profitability was the standout aspect of the results. Operating margin in 2020 was 12.5%, a significant improvement from 5% in 2019 and within the range of its 2022 target of 12% to 14%.

The gross margin in its core networks business, which drove revenue growth with an 11% year-over-year increase across 2020, was 43.5% in the final three months of the year, from 41.1% in 2019. The segment also grew sales by 20% in the fourth quarter.

The telecoms giant was boosted across the full year by its success in growing its 5G market share, especially in Europe. The group has signed 127 global 5G contracts to date, up from 112 at the end of the third quarter.

“The pandemic has fast-forwarded the digitalization of societies, including remote working, by months if not years,” said Börje Ekholm, Ericsson’s president and chief executive. “We see more signs that countries and enterprises see 5G as a key access technology, with increasing deployment speed in Australia, the Middle East, North East Asia and the U.S.”

Plus:It’s the Year of Digital Infrastructure. Here Are 4 Stocks to Buy.

Looking ahead. Ericsson handled 2020 well, growing its market share and sales against the backdrop of a year that has hurt many companies. The increase in profitability by way of margins is a real cause for celebration, and explains the surge in the stock price.

But having reached 2022 margin targets a year early, it now needs to be more ambitious.

China remains a major existential risk for the company. The Swedish decision to ban Huawei has yet to bring down ire on Ericsson from the Chinese government, but it could still come, and the chief executive noted this risk on Friday. While Western bans on Huawei helped Ericsson grow its market share, it’s uncertain whether this would be a net positive in the long-term should the Chinese market close up.