What happened
Shares of Telefonaktiebolaget LM Ericsson (ERIC -0.76%) fell as much as 10.8% Thursday morning, making a modest recovery to a price drop of 8.9% by noon ET. The Swedish provider of equipment and services for telecom and networking infrastructure posted second-quarter results today, falling short of analyst expectations across the board.
So what
Ericsson saw top-line sales fall 2.6% year over year to $6.36 billion. Earnings came in at $0.14 per diluted share, unchanged from the year-ago period. Your average analyst was looking for earnings near $0.16 per share on revenue in the neighborhood of $6.45 billion.
Management said that sales were held back by limited supplies of the semiconductors used in Ericsson's networking hardware, and inflationary pressures are driving up the cost of hardware components. Higher transportation and delivery costs play a large part in that story.
At the same time, Ericsson saw strong and rising demand for 5G solutions, driving organic growth in four out of five geographic reporting areas.
Now what
The company is adjusting to global inflation and transportation issues by revamping its supply chains. Ericsson has shifted its focus away from minimal costs to shape a more robust lattice of supply alternatives, which should be able to operate more smoothly in difficult macroeconomic conditions.
Ericsson is working to tackle macro challenges in the near term, and that effort should also pay dividends in the long run. Meanwhile, the 5G market continues to represent a terrific target market for years to come. On the earnings call, CEO Börje Ekholm said that 50% of global 5G traffic (excluding China) is carried on Ericsson's radio networks:
With 5G, anything that can go wireless will go wireless. This puts Ericsson in a very good position as 5G is rolled out and transforms every sector of the society. 5G is, by far, the fastest-scaling mobile technology ever. However, global penetration is still in an early phase.
So Ericsson's long-term business prospects look great, but investors are still focused on the more-immediate signals of disappointing results in this particular quarter.
The stock is now trading at four-year lows at a forward price-to-earnings ratio of just 8.8. This strikes me as a good time to pick up a few Ericsson shares as a direct bet on booming 5G markets.
