Investors ditched telecom major Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) in droves after the company warned that sales in its third quarter could be lower by as much as 14% compared to guidance. Operating income is expected to skid 93% year on year.
Shares stepped off a cliff so to speak on Wednesday, plunging 20.83% to $5.55. A huge 57.95 million shares changed hands, with reverberations felt in the sector in the US – Cisco Systems ended 2.26% lower, Nokia Corp was down 5.57% and Orange fell almost one per cent.
The plunge was the biggest the stock has seen in 9 years. Meanwhile, its quarterly sales number saw the biggest decline in 13 years. Gross margin at 28% was the lowest since 2001.
Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC): Shades of the dot-com bust?
The steep fall in Ericsson shares evoked memories of the dot-com bubble burst – could history be about to repeat itself?
“The company blindsided investors with an early morning profit warning the likes of which haven’t been seen since the burst of the dot com bubble 15 years ago,” said telecom reporter Kim McLaughlin on Bloomberg TV.
Nevertheless, investors should have been on guard considering Ericsson’s announcement on October 4 that it was laying off 3000 workers in Sweden amidst downsizing operations. The company blamed “technology shifts” and said it planned to cut costs by $1.05 billion by 2017.
Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC): CEO firing, another red flag
That all was not well was also evident in the July when CEO Hans Vestberg left all assignments, “effective immediately” but remained at the company’s disposal during his term of notice of six months, according to the Ericsson announcement.
Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) undone by weak economic markets
Ericsson blamed the profit warning on weak mobile demand, particularly in markets such as Brazil, Russia and the Middle East, which featured a weak macro-economic environment.
“The negative industry trends have further accelerated affecting primarily Segment Networks,” said Jan Frykhammar, President and CEO. “Continued progress in our cost reduction programs did not offset the lower sales and gross margin.”
Technically, on the monthly chart, Ericsson has formed a huge rounding top and is now within spitting distance of its November 2008 low of $4.43.
This looks ominous for the stock.