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Telefonaktiebolaget L M Ericsson ADR Class B ERIC

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Ericsson’s Momentum Hits a Great Chinese Wall in Q2 With Geopolitical Concerns

Mark Cash Senior Equity Analyst

Analyst Note

| Mark Cash |

Although second-quarter results greatly missed our expectations as a result of weak mainland China results, we are maintaining our SEK 110 fair value estimate for no-moat Ericsson (decreasing U.S. ADR to $12.70 from $13). Shares fell about 10% on the weaker-than-anticipated results and the cautious outlook management provided, and we now see shares as fairly valued. While there are positive takeaways, including strong momentum in Europe and the signing of its largest contract ever (Verizon in the U.S.), Ericsson is in the crosshairs between Sweden and China after Sweden banned Chinese network equipment for 5G buildouts, including from industry leader Huawei. Ericsson’s mainland China revenue fell precipitously by 60% year over year to SEK 1.5 billion in the quarter (now 3% of total revenue, down from 7% in the prior year’s quarter). The important China market drives about 50%-60% of equipment volume, and Ericsson said that its solutions had become margin-accretive in the market. With management saying that it does not expect to regain any share losses in China, we view this a huge blow to the overall 5G opportunity. However, we expect Ericsson to continue its strong execution with 5G rollouts and to continue gaining share elsewhere.

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Company Profile

Business Description

Ericsson is leading supplier within the telecommunications equipment sector. The company's three major operating segments are networks, digital services, and managed services. Ericsson sells hardware, software, and services primarily to communication service providers while licensing patents to handset manufacturers. The Stockholm, Sweden-based company derives sales worldwide and had 95,000 employees as of June.

Torshamnsgatan 21, Kista
Stockholm, SE-164 83, Sweden
T +46 107190000
Sector Technology
Industry Communication Equipment
Most Recent Earnings Jun 30, 2021
Fiscal Year End Dec 31, 2021
Stock Type
Employees 101,624


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