Programmable Networks And Aduna Joint Venture Will Redefine Telecom Industry In The Coming Years

Key Takeaways

• Ericsson's focus on programmable networks and strategic joint ventures may redefine the telecom industry, enhancing performance and revenue streams.
  
• Structural cost reductions and energy-efficient solutions aim to improve margins, strengthen cash flow, and boost earnings growth.
  
• Geopolitical risks and uneven global sales growth pose challenges to Ericsson's revenue stability, with strategic initiatives facing execution and adoption hurdles impacting margins.

Catalysts

Provides mobile connectivity solutions for telcom operators and enterprise customers in various sectors in North America, Europe, Latin America, the Middle East, Africa, North East Asia, South East Asia, Oceania, and India.

• Ericsson's focus on programmable networks and open API architectures aims to enable service providers to deliver differentiated performance and monetize new applications, potentially boosting future revenue streams.
  
• The strategic joint venture with service providers to aggregate and sell network APIs, known as Aduna, is expected to redefine the telecom industry and contribute to future growth, impacting revenue and net margins positively.
  
• The rollout of sustainable Massive MIMO radio solutions with energy savings and new RAN software capabilities could enhance operational efficiency and programmability, likely improving net margins.
  
• Ericsson's focus on enterprise wireless solutions and the expansion of their enterprise 5G portfolio, including neutral host solutions for indoor connectivity, indicates potential revenue growth in the enterprise sector.
  
• Structural cost reductions and improvements in gross and EBITA margins due to rigorous cost management are expected to strengthen cash flow and balance sheet, supporting earnings growth.

Telefonaktiebolaget LM Ericsson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Telefonaktiebolaget LM Ericsson's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.0% today to 8.0% in 3 years time.
• Analysts expect earnings to reach SEK 21.2 billion (and earnings per share of SEK 6.38) by about January 2028, up from SEK 20.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK23.9 billion in earnings, and the most bearish expecting SEK17.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2028 earnings, down from 14076.1x today. This future PE is lower than the current PE for the GB Communications industry at 53.4x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.37%, as per the Simply Wall St company report.

Telefonaktiebolaget LM Ericsson Future Earnings Per Share Growth

Risks

• Geopolitical risks, such as potential tariffs on imports from Asia to North America, could impact Ericsson's supply chain costs and operational efficiency, potentially affecting net margins.
  
• Declining sales and intense competition in markets such as Latin America, Southeast Asia, and India might exert pressure on overall revenue growth.
  
• Although sales increased in North America and Europe, declines in other regions could result in uneven revenue streams, impacting overall financial stability.
  
• Potential challenges in executing and monetizing new strategic initiatives, such as programmable networks and network APIs, could affect revenue growth if adoption is slower than anticipated.
  
• Changes in market and operational conditions, including a shift towards a higher software mix and changing customer investment patterns, could lead to variability in margins and earnings.

Valuation

• The analysts have a consensus price target of SEK84.74 for Telefonaktiebolaget LM Ericsson based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK102.0, and the most bearish reporting a price target of just SEK57.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK265.3 billion, earnings will come to SEK21.2 billion, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 5.4%.
  
• Given the current share price of SEK84.48, the analyst's price target of SEK84.74 is 0.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.