LM Ericsson Telephone

Ericsson reported decent second-quarter results, with relatively resilient revenue and margins offset by one-time revenue items in the year-ago period. Investors were concerned by news of rising input costs and margin pressure from increased network rollout volumes, sending shares down 10%.

Why it matters: Given Ericsson's reliance on cyclical telecom customers, mixed revenue performance is common for the firm, while rising input costs, specifically semiconductors, are likely to weigh on margins that the firm has spent years cutting to maintain. Outside of enterprise, results were mostly constructive. Organic revenue was down 1%, but up slightly when excluding the impact of one-time revenue, a year ago, and adjusted gross margins expanded slightly, up 40 basis points to 48.4%. We expect ups and downs in improving firm performance, but increasing semiconductor costs will likely be a longer-term issue. When taken with the need for research and development, we expect margin expansion to be difficult.

The bottom line: After adjusting our model to reflect higher medium-term input costs, we have trimmed our fair value estimate for no-moat Ericsson to SEK 100 from SEK 105. These price increases are a headwind but are less consequential than continued success in capturing mobile telecom demand. While raising prices on equipment, product substitutions, and cost-cutting should moderate much of the rising input costs, we don't think Ericsson will be able to pass all of the costs on to telecom customers who have been reducing capex budgets.

Long view: Ericsson has puts and takes, from opportunities for AI deployment in networks and threats from open radio access networks, but the firm's strong position in major markets should allow it to adapt to changing industry dynamics successfully. The enterprise segment, which has long been loss-making, continues to be a major concern. Despite slow progress, a strong balance sheet affords the firm time to manage a turnaround.

Our fair value estimate is $10.4, based on the July 14 exchange rate of SEK 9.66/$1. This implies price/earnings and enterprise value/EBITDA multiples of 22 and 10, respectively, on our 2026 estimates.

We forecast revenue to remain flat between 2026 and 2030, with stronger growth beyond 2030, as Ericsson likely maintains a market share in 6G networks similar to its 5G share. While still in early development, products compliant with 6G standards are likely to be commercially available beginning around 2030. Reduced capital investment targets for wireless carriers and technological challenges, such as ORAN, are likely to cap Ericsson's 6G growth opportunities relative to 5G. We expect the networking segment to continue to generate a mid-60s percentage of revenue and a lion’s share of profit, while the cloud software segment grows and the enterprise segment continues its turnaround.

We believe firm profitability will be relatively stable, with potential for incremental margin expansion through cost savings, partially offset by increasing semiconductor and other input costs. Commoditization of networking equipment is likely to reduce Ericsson's pricing power, but a shift toward software and service offerings should help offset this pressure.

Turning around performance in the enterprise segment should be a priority for the firm and a likely source for margin improvement in the coming years. Given the need to invest heavily in research and development, we see little room to reduce R&D as a percentage of sales from 20% without significant revenue increases. Any such revenue increase would need to come from an irreplicable innovation in Ericsson’s business model, which we view as unlikely. Overall, we expect the operating margin to grow from 12.7% in 2025 to 13.8% in 2030, then expand more modestly thereafter.

We assign Ericsson an 8.5% cost of capital, assuming a 9.3% cost of equity, a 4.2% cost of debt, and a favorable inflationary adjustment of 0.3%.

We assign Ericsson a no-moat rating. While the firm possesses some characteristics of an economic moat, it operates in the structurally challenged, highly cyclical telecom equipment industry. To compete, Ericsson must invest heavily in research and development. Because of intense industry pressures, generating a long-term, durable spread between the return on invested capital and its cost of capital is incredibly difficult. By our measure, ROICs have not exceeded Ericsson’s cost of capital over the past 10 years and will not do so reliably over the next several years.

Ericsson’s strongest claim to competitive advantage would likely stem from intangible assets. The firm possesses a substantial patent portfolio and deep technological expertise in mobile and enterprise networking. This portfolio includes 60,000 patents, many of which underpin existing 5G networks. While the firm directly monetizes its patent portfolio, generating over EUR 1 billion in patent licensing revenue, the R&D required to develop them is immense. Additionally, we believe many of these patents have a short useful life, as networking standards constantly change. Also, as with other parts of the business, competitors can typically offer similar patent alternatives.

Ericsson has spent over EUR 20 billion on R&D in the past five years, about 16% of sales, to maintain its position in 5G, cloud software, and application-specific integrated circuits. However, R&D spending is merely the cost of survival, not a guarantee of excess economic returns. The pace of technological disruption is relentless. Furthermore, Ericsson's R&D budget is dwarfed by that of Chinese rival Huawei, which spent $28 billion on R&D in 2025 (accounting for 22% of its sales).

While Ericsson doesn’t invest as much as its Chinese competitors, it benefits from governmental regulations in Western-aligned countries. With Chinese vendors banned in the United States, Ericsson has captured over 50% of the US 5G wireless equipment market. Operating in this less competitive oligopoly, primarily against Nokia, Ericsson has been able to charge significantly higher prices in the US than elsewhere. While the US market is the most profitable, its outsize profits cannot fully offset the lower-margin dynamics in other markets.

Ericsson’s major customers, especially mobile carriers, are highly cost-conscious, forcing the firm to compete on cost of ownership. We don’t believe equipment vendors produce meaningfully differentiated equipment, which encourages carriers to aim for the widest coverage at the lowest cost. Additionally, in most countries, wireless carriers are oligopsonies, with their bargaining power exceeding that of the networking equipment providers.

The other potential moat source for Ericsson is switching costs. In industrial technology and telecom equipment, switching costs are largely driven by the risk of downtime, the high cost of failure, and the complex retraining and integration required to replace core network infrastructure and software. Historically, if a customer wanted to switch from Nokia to Ericsson equipment and software, it would have to remove all Nokia equipment and replace it with Ericsson equipment and software (or a major portion of it). Often, this leads service providers to replace networking equipment on a site-by-site or region-by-region basis, which is more time-consuming but less error-prone.

While some switching costs exist, they are clearly not insurmountable. Major mobile service providers are willing to endure the friction of switching vendors if the financial or technological value proposition is strong enough. For example, Nokia lost out on new contracts when Verizon chose Samsung for part of its 5G network in 2020. Ericsson itself recently proved this by displacing Nokia to win a massive network contract with AT&T. More importantly, the looming threat of ORAN aims to reduce switching costs by disaggregating hardware and software into open, vendor-neutral architectures. This effectively allows operators to mix and match vendors.

Ericsson retains a dominant position in the US, which is the most profitable market for wireless networking equipment providers.

5G use cases have continued to expand beyond carrier networks, allowing for more ways to monetize the large investments Ericsson must make in R&D to compete.

The Western prohibition on Chinese equipment vendors has allowed Ericsson to capture greater market share at higher margins than before 2019.

Carriers continue to try to commoditize portions of Ericsson’s product offerings. The latest attempt, ORAN, threatens to disaggregate software and hardware, making it easier for carriers to play vendors off each other.

Ericsson’s customers are largely limited to wireless service providers, resulting in high customer concentration and lower negotiating leverage.

Efforts to expand into new business lines through M&A have been largely unsuccessful or expensive, with Vonage and Iconectiv recent examples.