VALUATION HIGHLIGHTS

1. Networks constitute 73% of the Trefis price estimate for Ericsson's stock.
2. Cloud Software & Services constitutes 27% of the Trefis price estimate for Ericsson's stock.

WHAT HAS CHANGED?

1. Latest Earnings - Q4'2023

Ericsson posted a better-than-expected set of Q4 2023 results, but warned of a tough 2024 as demand for 5G networking equipment eases, amid slowing capital spending by wireless carriers in the United States. Ericsson's revenue for the quarter declined by -16% year-over-year to SEK 71.9 billion ($6.86 billion). Operating profit (EBIT) excluding restructuring charges fell to SEK 7.37 billion ($700 million).

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Ericsson's value that present opportunities for upside or downside to the current Trefis price estimate:

Networks

• Network Revenues: Ericsson is one of the top players in the Mobile (Wireless) Infrastructure market. The division also contributes roughly 65% of the company's revenues. We estimate that revenues will increase from levels of about $16 billion in 2023 to close to $17.5 billion by 2030, driven by slightly higher spending on 5G equipment. However, if Ericsson is not able to achieve this, due to increased competition and its revenue drops to about $14 billion in the same time frame, there could be a downside of about 10% to our price estimate.
  

• Networks EBITDA Margin: Margins for the networking division stood at 13% by 2023. We expect the metric to improve to levels of around 15% by the end of our review period. However, if the metric remains flat at 13% due to competition from Chinese players, who are betting big on 5G technology, there could be a downside of about 10% to our price estimate. On the other hand, if the company boosts margins to 18% by the end of our review period, there could be an upside of close to 10% to our price estimate.

For additional details, select a driver above or select a division from the interactive Trefis split for Ericsson at the top of the page.

BUSINESS SUMMARY

Sweden-based Ericsson provides communication infrastructure, services, and software solutions to the telecom and other sectors. It operates through four segments: Networks, Cloud Software and Services, Enterprise, and Other.

SOURCES OF VALUE

Networks

Accounting for over 65% of Ericsson's overall revenues, Networks is the dominant division for the company. It is dominated by the Wireless division offering mobile communication equipment, including 3G and 4G/LTE solutions. Ericsson occupies the top spot in the global Wireless equipment market with about a 30% market share. It is positioned well to benefit from this $40 billion market over the short- to medium-term. The other products offered under this division are the fixed-line products for copper and fiber, microwave backhaul systems, and modems.

KEY TRENDS

The 5G Upgrade Cycle

Operators across the world have started to outline plans for their 5G upgrades, with U.S. carriers commencing commercial deployments of the technology in 2018. For instance, AT&T and Verizon have deployed 5G mmWave services in over 30 markets by the end of 2019, while Verizon is bringing fixed 5G to homes in multiple U.S. cities. Other regions, including South Korea, China, Japan, and the Middle East, commenced their build-outs in 2019. Ericsson projects that there could be 3.5 billion Internet of things” connections on networks running 5G by 2023, with roughly 1 billion mobile customers, which translates to approximately 12% of total projected mobile subscriptions. Ericsson is betting on next-generation technology to drive growth after posting mixed results over the last few years amid intense competition from Chinese equipment manufacturers and weaker spending by wireless carriers.

Equipment Modernization in Europe and Capacity Building in Asia

Ericsson's mobile equipment modernization drive in Europe is likely to improve profitability due to increased efficiency and lower costs. Also, a gradual shift from coverage projects to capacity-building projects is being done by the company. Increasing coverage in Asia, Europe, and Latin America has come at the cost of margins in the past couple of years, but as it reaches completion in the near term, profitability is expected to rise which will help counter the stiff competition being provided by Chinese manufacturers such as Huawei and ZTE.

Hardware to Software Shift in Telecommunications Market

There has been an industry-wide shift in demand from hardware networking solutions to software-based ones in the long run. This poses an interesting challenge to traditional hardware-based players such as Ericsson, Cisco, and Juniper. However, Ericsson is showing adaptability with its increased focus on software and support solutions, where it is competing with many small and local service providers.