US China Tensions And Tariff Risks Will Shrink Margins

Key Takeaways

• Rising geopolitical and regulatory complexities are driving up costs, shrinking margins, and forcing difficult operational adaptions across Ericsson's supply chain and core markets.
  
• Intensifying competition and sluggish network investment adoption threaten Ericsson's pricing power, revenue visibility, and long-term earnings growth.
  
• Strategic investments in AI, 5G applications, and global market expansion are driving sustained margin growth, operating efficiency, and more resilient, recurring earnings.

Catalysts

Provides mobile connectivity solutions to communications service providers, enterprises, and the public sector.

• Heightened geopolitical tensions and growing de-globalization, particularly ongoing US-China rivalry and escalating global tariff risks, threaten to fragment core telecom markets and force Ericsson into significant supply chain and operational redesigns, which will increase compliance and manufacturing costs and limit addressable revenue growth.
  
• Persistent pricing pressure from aggressive Chinese competitors and the trend toward commoditization of network infrastructure-amplified by the adoption of Open RAN standards-will erode Ericsson's ability to command premium pricing, leading to long-term margin compression and deteriorating profitability.
  
• Prolonged capex cycles and continued delays in broader 5G stand-alone and future 6G rollouts, especially in Europe and parts of Asia, signal that customer network investments will remain muted, resulting in structurally weaker revenue trajectories and diminished backlog visibility over the medium term.
  
• Escalating regulatory demands related to data privacy, security, and environmental standards across multiple jurisdictions are set to drive elevated compliance expenses and operational complexity, directly impacting net margins and cash flow generation.
  
• Excessive and recurring research and development outlays needed to maintain technological parity in a rapidly evolving landscape-amid intensifying competition from hyperscale cloud providers entering the telecom domain-will outpace incremental revenue gains, putting sustained pressure on free cash flow and long-term earnings growth.

Telefonaktiebolaget LM Ericsson Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Telefonaktiebolaget LM Ericsson compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Telefonaktiebolaget LM Ericsson's revenue will decrease by 1.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 7.0% today to 6.1% in 3 years time.
• The bearish analysts expect earnings to reach SEK 14.2 billion (and earnings per share of SEK 4.38) by about July 2028, down from SEK 17.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.8x on those 2028 earnings, up from 13.9x today. This future PE is lower than the current PE for the GB Communications industry at 101.5x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.27%, as per the Simply Wall St company report.

Telefonaktiebolaget LM Ericsson Future Earnings Per Share Growth

Risks

• The accelerating rollout of 5G stand-alone networks and new enterprise and mission-critical applications-such as fixed wireless access, defense communications, and network slicing-are starting to drive service innovation and new revenue streams, which can underpin long-term revenue growth and margin expansion.
  
• AI is becoming embedded both in Ericsson's product offering and internal operations, with investments in AI infrastructure and intent-based autonomous networks poised to create efficiency gains and product differentiation, potentially increasing margins, lowering costs, and supporting future earnings growth.
  
• Ericsson has demonstrated broad-based margin improvements, with cost-reduction programs translating into sustainable lower operating expenses and higher gross and EBITA margins, which could drive continued improvement in net profits and return on capital.
  
• Strategic expansion in key global markets such as North America, India, and Japan-including local R&D investments and strengthened manufacturing footprints-positions Ericsson to gain market share and better insulate itself from geopolitical risks, enhancing long-term sales and profitability.
  
• Continuous improvement in Cloud Software and Services, with rising software mix and disciplined execution, is generating robust recurring earnings and EBITA margin growth, which may result in more stable and predictable long-term cash flows.

Valuation

• The assumed bearish price target for Telefonaktiebolaget LM Ericsson is SEK56.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Telefonaktiebolaget LM Ericsson's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK100.0, and the most bearish reporting a price target of just SEK56.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK233.2 billion, earnings will come to SEK14.2 billion, and it would be trading on a PE ratio of 15.8x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of SEK72.1, the bearish analyst price target of SEK56.0 is 28.7% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.