Regional Sales Declines Will Persist, Yet New 5G Ventures Could Open Future Revenue Streams

Key Takeaways

• Ericsson faces challenges with declining sales growth in key regions, strategic focus on new use cases poses risks of delayed revenue realization.
  
• Increased competition and customer caution in traditional markets may pressure pricing, while focus on profitable markets elevates operational expenses, affecting earnings.
  
• Ericsson's diversified strategy focusing on 5G and network APIs aims to boost revenue, enhance margins, and capitalize on new market demands despite challenging conditions.

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.

• The slowdown in Ericsson's organic sales growth, particularly in regions like Southeast Asia, Australia, and India, where sales decreased by 43%, suggests a challenging market environment that may impact future revenue growth.
  
• Ericsson's strategy to focus on new use cases such as enterprise and mission-critical applications, and monetization through programmable networks, may take time to materialize and carry risks of delayed realization, potentially affecting projected revenue streams.
  
• Competition and customer investment caution in traditional RAN markets could put pressure on Ericsson's pricing power, potentially impacting gross margins despite current improvements.
  
• The decision to focus on profitable markets and upcoming investments, especially in the enterprise sector, may lead to increased operational expenses and affect near-term net margins.
  
• Possible restructuring costs and inflationary pressures could lead to higher operational expenses, impacting overall earnings growth if not mitigated by sufficient cost savings or increased revenues.

Telefonaktiebolaget LM Ericsson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Telefonaktiebolaget LM Ericsson's revenue will grow by 1.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -0.6% today to 15.3% in 3 years time.
• Analysts expect earnings to reach SEK 39.6 billion (and earnings per share of SEK 12.29) by about December 2027, up from SEK -1.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2027 earnings, up from -221.5x today. This future PE is lower than the current PE for the GB Communications industry at 25.6x.
• Analysts expect the number of shares outstanding to decline by 1.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.35%, as per the Simply Wall St company report.

Telefonaktiebolaget LM Ericsson Future Earnings Per Share Growth

Risks

• Ericsson's strategy focuses on building programmable networks to introduce new use cases and revenue streams beyond traditional consumer mobile broadband. This diversified approach has the potential to significantly boost future revenue.
  
• Despite a challenging market environment, Ericsson has seen significant organic growth in North America and Europe, driven by strategic contract wins, such as with AT&T, which have improved gross margins and contributed to EBITA growth. This indicates a strong upside potential for revenue and earnings.
  
• Investments in technology leadership, particularly in 5G and network APIs, position Ericsson to capitalize on market demands. The expectation of a SEK 13 billion IPR revenue for 2024, with future growth opportunities, bolsters potential future earnings.
  
• Network API initiatives, including a joint venture with global CSPs, are expected to enable new revenue streams through innovative use cases. If successful, these could contribute significantly to Ericsson’s future earnings, beyond current projections.
  
• Ericsson's operational improvements, such as supply chain optimization and cost-out activities, have led to increased efficiency and margin improvements. This focus on operational excellence is likely to protect and potentially enhance profit margins, even in a tough market.

Valuation

• The analysts have a consensus price target of SEK 79.67 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 SEK 100.0, and the most bearish reporting a price target of just SEK 45.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be SEK 258.1 billion, earnings will come to SEK 39.6 billion, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 5.4%.
• Given the current share price of SEK 90.72, the analyst's price target of SEK 79.67 is 13.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.