Company Reports

Ericsson's steep revenue declines continued during the first quarter, which we attribute to the ongoing pullback in mobile carrier spending globally rather than company-specific challenges. However, margins were generally good, cash flow was strong, and North America appears to be stabilizing. We don't believe the global market for mobile network equipment will continue shrinking, which makes Ericsson's stock much too beaten up in our view, as we are maintaining our SEK 92 fair value estimate.

In its core business of selling to wireless carriers, Ericsson enjoyed success in the early stages of public 5G network buildouts. According to Ericsson, its global radio access network, or RAN, market share, excluding China, jumped from 33% in 2017 to 39% in 2022. While carriers typically source from multiple vendors, and Ericsson has benefited by the explicit or implicit exclusion of Huawei and ZTE equipment in many Western markets, there is little doubt Ericsson has outperformed, as Nokia has acknowledged RAN market share weakness. Ericsson is poised to capitalize on its early inroads as a preferred vendor. As its customers continue building out their 5G networks, Ericsson should take an outsize share of follow-on services and subsequent equipment needs.

Ericsson posted weak fourth-quarter sales, largely consistent with the trend that persisted throughout 2023, and said it expects 2024 to be a similarly challenging year. We’re also not impressed with margins following the progress management said it has made in its cost-reduction program. However, we’ve long been skeptical of the margin targets the firm has forecast, and we believe global mobile network spending must pick up eventually as mobile data usage continues to grow rapidly and carriers must continue building out 5G networks, which will reverse Ericsson’s networks revenue decline. We’re reducing our fair value estimate to SEK 92 from SEK 95 due to a bleaker 2024 outlook, but we think the stock remains undervalued.

In its core business of selling to wireless carriers, Ericsson enjoyed success in the early stages of public 5G network buildouts. According to Ericsson, its global radio access network, or RAN, market share, excluding China, jumped from 33% in 2017 to 39% in 2022. While carriers typically source from multiple vendors, and Ericsson has benefited by the explicit or implicit exclusion of Huawei and ZTE equipment in many western markets, there is little doubt Ericsson has outperformed, as Nokia has acknowledged RAN market share weakness. Ericsson is poised to capitalize on its early inroads as a preferred vendor. As its customers continue building out their 5G networks, Ericsson should take an outsize share of follow-on services and subsequent equipment needs.

In its core business of selling to wireless carriers, Ericsson enjoyed success in the early stages of public 5G network buildouts. According to Ericsson, its global radio access network, or RAN, market share, excluding China, jumped from 33% in 2017 to 39% in 2022. While carriers typically source from multiple vendors, and Ericsson has benefited by the explicit or implicit exclusion of Huawei and ZTE equipment in many western markets, there is little doubt Ericsson has outperformed, as Nokia has acknowledged RAN market share weakness. Ericsson is poised to capitalize on its early inroads as a preferred vendor. As its customers continue building out their 5G networks, Ericsson should take an outsize share of follow-on services and subsequent equipment needs.

Nokia and Ericsson stocks had sizable moves in opposite directions on Dec. 5 on the news that AT&T intends to deploy Ericsson’s open radio access network, or O-RAN, equipment throughout most of its - network by 2026. At the margins, the news is positive for Ericsson and negative for Nokia, but we think the market has overreacted to how consequential the contract is, and we don’t think this portends further deterioration at Nokia while Ericsson gains share. We are maintaining our EUR 5.50 fair value estimate for Nokia and SEK 95 fair value estimate for Ericsson.

Ericsson previously forecast a soft third quarter, but the results were even worse than we anticipated. Management said the fourth quarter looks similarly difficult and that current business conditions should continue into 2024. While we think the firm has stumbled in its capital allocation strategy—as witnessed by this quarter’s huge goodwill write-down—we don’t think the poor current results reflect a declining need for Ericsson’s products. We’re maintaining our SEK 95 fair value estimate and think the stock remains undervalued.

In its core business of selling to wireless carriers, Ericsson enjoyed success in the early stages of public 5G network buildouts. According to Ericsson, its global radio access network, or RAN, market share, excluding China, jumped from 33% in 2017 to 39% in 2022. While carriers typically source from multiple vendors, and Ericsson has benefited by the explicit or implicit exclusion of Huawei and ZTE equipment in many western markets, there is little doubt Ericsson has outperformed, as Nokia has acknowledged RAN market share weakness. Ericsson is poised to capitalize on its early inroads as a preferred vendor. As its customers continue building out their 5G networks, Ericsson should take an outsize share of follow-on services and subsequent equipment needs.

As expected, Ericsson’s second-quarter results were weak, with reduced wireless network spending in the U.S. causing a big dip in organic sales and pressuring margins, relative to last year. While the second-quarter performance was in-line to slightly better than what management had publicly anticipated, management wavered on the timing of a reacceleration, which it previously expected in the second half of 2023. None of this has any bearing on our long-term forecast. We expect mobile network spending to be cyclical, but for there to be very little average annual growth over the long term. We are maintaining our SEK 95 fair value estimate and believe the stock is undervalued.

In its core business of selling to wireless carriers, Ericsson enjoyed success in the early stages of public 5G network buildouts. According to Ericsson, its global RAN market share, excluding China, jumped from 33% in 2017 to 39% in 2022. While carriers typically source from multiple vendors, and Ericsson has benefited by the explicit or implicit exclusion of Huawei and ZTE equipment in many western markets, there is little doubt Ericsson has outperformed, as Nokia has acknowledged RAN market share weakness. Ericsson is poised to capitalize on its early inroads as a preferred vendor. As its customers continue building out their 5G networks, Ericsson should take an outsize share of follow-on services and subsequent equipment needs.

Ericsson reported weak sales and poor margins for the first quarter, and management’s outlook for the second quarter pointed to further deterioration in results. Tough comps in 2023 and the firm’s cost-cutting program lead us to believe the firm will return to sales growth and see significantly improved margins in 2024. We’re reducing our fair value estimate by SEK 5 to SEK 95, and we think the stock is materially undervalued despite near-term headwinds.

In its core business of selling to wireless carriers, Ericsson enjoyed success in the early stages of public 5G network buildouts. According to Ericsson, its global RAN market share, excluding China, jumped from 33% in 2017 to 39% in 2022. While carriers typically source from multiple vendors, and Ericsson has benefited by the explicit or implicit exclusion of Huawei and ZTE equipment in many western markets, there is little doubt Ericsson has outperformed, as Nokia has acknowledged RAN market share weakness. Ericsson is poised to capitalize on its early inroads as a preferred vendor. As its customers continue building out their 5G networks, Ericsson should take an outsize share of follow-on services and subsequent equipment needs.

Meager sales growth and margin pressure plagued Ericsson’s fourth quarter, and management cited several items it expects to weigh on 2023 results. The firm maintains that these challenges are transitory and that performance will pick up substantially by 2024. While 2023 may prove worse than a typical year, we’re unconvinced that Ericsson’s future growth will look any different from the recent past. Nothing in the quarter changes our low-growth long-term outlook. That said, we believe the company will remain a key player as 5G networks are built out across the globe, so the stock looks overly punished relative to our unchanged SEK 100 fair value estimate.

In its core business of selling to wireless carriers, Ericsson enjoyed success in the early stages of public 5G network buildouts. According to Ericsson, its global RAN market share, excluding China, jumped from 33% in 2017 to 39% in 2022. While carriers typically source from multiple vendors, and Ericsson has benefited by the explicit or implicit exclusion of Huawei and ZTE equipment in many western markets, there is little doubt Ericsson has outperformed, as Nokia has acknowledged RAN market share weakness. Ericsson is poised to capitalize on its early inroads as a preferred vendor. As its customers continue building out their 5G networks, Ericsson should take an outsize share of follow-on services and subsequent equipment needs.

Ericsson announced that it has reached a multiyear agreement with Apple that allows Apple to continue licensing Ericsson’s patents for use in Apple products. The deal follows a year of litigation between the companies after the prior contract expired at the beginning of 2022, but it does not mark a change in Apple’s use of Ericsson’s intellectual property. We expected the dispute to be settled, and it does not change our long-term forecast or SEK 100 fair value estimate for Ericsson.

High costs were the most discouraging component of Ericsson’s third quarter, and we expect this quarter is a harbinger for what the next year will look like. After stripping currency tailwinds from the stellar-looking sales results, revenue growth was good, especially considering the firm’s ongoing patent dispute with Apple. However, considering that Ericsson is in the sweet spot of the 5G upgrade cycle, we didn’t think organic revenue growth was overly impressive.

In its core business of selling to wireless carriers, Ericsson enjoyed success in the early stages of public 5G network buildouts. According to Ericsson, its global RAN market share, excluding China, jumped from 33% in 2017 to 39% in 2022. While carriers typically source from multiple vendors, and Ericsson has benefited by the explicit or implicit exclusion of Huawei and ZTE equipment in many western markets, there is little doubt Ericsson has outperformed, as Nokia has acknowledged RAN market share weakness. Ericsson is poised to capitalize on its early inroads as a preferred vendor. As its customers continue building out their 5G networks, Ericsson should take an outsize share of follow-on services and subsequent equipment needs.

Ericsson is a leading provider of hardware, software, and services to communications service providers. The company is excelling in 5G build-outs and gaining share. 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.

We are lowering our fair value estimate for no-moat Ericsson to SEK 100 from SEK 110 (U.S. ADR to $9.40 from $11.50 due to near-term profitability concerns and foreign exchange) after its second-quarter results surpassed our top-line expectations but fell short of our earnings expectations. We still view shares as undervalued after they fell 8% post earnings results. The fair value change comes on the back of Ericsson’s earnings release that indicated persistent supply chain and inflationary challenges leading to increased costs and therefore tighter margins.

Ericsson is a leading provider of hardware, software, and services to communications service providers. The company is excelling in 5G build-outs and gaining share. 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.