What’s The Upside For Ericsson From The Blacklisting Of Huawei?

The United States has imposed export restrictions on the sale of U.S. components and software to Huawei, the largest telecom equipment company, making it difficult for the company to build its products. The U.S. has also been persuading its allies to stop using Huawei equipment, amid concerns that it promotes spying by the Chinese government. Huawei is seen as a leader of sorts in the 5G market, outspending its rivals on R&D ($15+ billion in 2018 vs. $4 billion for Ericsson) and holding the largest number of 5G related patents. With the company’s current headwinds, there could be an opportunity for Ericsson (NASDAQ:ERIC) and Nokia to close the gap. In this interactive analysis, we look at the potential upside to Ericsson stock if it is able to gain at Huawei’s expense.

View our interactive dashboard analysis on What’s The Upside For Ericsson From The Blacklisting Of Huawei? You can modify our forecasts to arrive at your own estimates.

Network Equipment: Assuming 10% Higher 2021 Revenues

• In our base case, we expect Ericsson’s networking revenues to grow to about $18 billion in FY’21 from around $16 billion in FY’19, driven by higher 5G related spending.
• However, under a scenario that Huawei equipment faces a lower uptake due to the U.S. sanctions, we estimate that Ericsson’s sales could be higher by about 10% by FY’21.
• We have kept the upside revenues conservative, as replacing Huawei’s equipment altogether will be difficult given the company’s technology lead.
• Moreover, Ericsson has also been banking on China to drive 5G growth and it is possible that the Chinese government could limit the access of global players to its market if Huawei faces a broader ban.

Digital Services & Managed Services: Assuming No Meaningful Upside

• We assume that Ericsson’s other two business divisions: Digital services and Managed services will not benefit meaningfully from Huawei’s woes.
• Ericsson has been focusing on turning around the Digital services business while carrying out contract rationalization in the Managed services space.

Estimating Ericsson’s Valuation

Step 1: Estimating Net Income

Ericsson’s margins could trend higher in our upside case, due to potentially higher pricing power.