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.