Morgan Stanley: Ericsson's Q3 performance may be dragged down by the North American market, maintaining a "Neutral" rating

According to Zhitong Finance APP, Morgan Stanley recently released a forward-looking report on Ericsson (ERIC.US) ahead of its Q3 2025 earnings release, focusing on Q3 performance expectations, the impact of business adjustments, and investment ratings. The Swedish leading company Ericsson will officially release its Q3 financial report on October 14, facing a landscape of "market weakness and business resilience." Morgan Stanley maintains a "neutral" rating with a target price of 80.00 Swedish Krona (SEK).

From the perspective of the market environment and core expectations for Q3 performance, the overall market growth remains weak, with telecom customers strictly controlling capital expenditures (capex), becoming the main pressure source for revenue growth. Among them, North America, as Ericsson's core market (accounting for 30-40% of revenue), is facing high base comparison pressure—AT&T's contract ramp-up in Q3 2024 will boost revenue for the same period, while there will be no new contracts of equivalent scale to support Q3 2025, potentially suppressing regional revenue growth and thereby lowering overall Q3 sales (expected at 56.108 billion SEK, a year-on-year decrease of 9.2%).

However, the mobile network business has become a key highlight, with its profit margin resilience exceeding expectations. Management guides a gross margin of 48%-50%, an increase from the Q2 base gross margin of 47%-48%, which is expected to be a "positive surprise point" for Q3 performance.

The sale of iconectiv is a core event affecting Q3 performance accounting. This transaction was completed in mid-August 2025, and Ericsson will recognize approximately 9.9 billion SEK in sale revenue, accounting for 7.6 billion SEK in one-time earnings before interest and taxes (EBIT). This income will be included in core profitability indicators such as EBIT and earnings before interest, taxes, depreciation, and amortization (EBITA), and will not be separately disclosed to reflect the trend of the underlying business.

Driven by this, the expected Q3 EBITA is 13.8 billion SEK, significantly higher than Q2's 7.4 billion SEK; after the sale, the company's net cash scale is expected to increase to 4.5 billion SEK, but management has not yet committed to special dividends or stock buybacks, planning to postpone discussions on cash return plans until the full-year report release in January 2026.

In addition, the bank believes that the impact of exchange rates is similar to previous periods. Reviewing the second quarter performance, exchange rate fluctuations had an adverse effect on profitability. The exchange rate impact this quarter is similar to that of the second quarter, with the Swedish Krona (SEK) bringing a slight negative impact, while the Euro (EUR) will provide a slight positive boost.

The financial model has undergone key adjustments due to the sale of iconectiv, which previously contributed approximately 4 billion SEK in revenue and 2 billion SEK in EBIT(A) annually. After adjustments, the performance in 2025 is significantly improved due to one-time gains: revenue is expected to be 23.3 billion SEK (248 billion SEK in 2024), EBIT is expected to be 3 billion SEK (500 million SEK in 2024), and earnings per share (EPS) is expected to be 7.10 SEK (only 0.01 SEK in 2024).

Starting in 2026, due to the exclusion of iconectiv from the consolidated financial statements, revenue, EBIT, and other indicators will show a mid-single-digit decline, with the expected EPS for 2026 at 5.94 SEK and revenue expected at 23.7 billion SEK. In the long term, the company's gross margin shows a trend of "slight decline after peaking in 2025," with an adjusted gross margin of 47.2% in 2025, and expected to be 46.8% in 2026-2027 46.2%; The dividend policy is stable, with dividends per share (DPS) expected to be 3.00, 3.15, and 3.15 SEK for 2025-2027, providing a dividend yield of 3.9%-4.1%, offering investors stable income support.

In addition, the report mentions that Ericsson's global revenue distribution is concentrated, with North America as the core market, accounting for about 30-40%. Outside of North America, revenue from regions such as Europe (excluding the UK), India, and Japan accounts for less than 10%, while the UK and Latin America account for 10%-20%. The high regional concentration may exacerbate the impact of fluctuations in a single market on overall performance.

In terms of valuation and scenario analysis, Morgan Stanley uses a projected EV/EBIT multiple of 8x for 2026 to calculate the target stock price, referencing the 4G cycle level—since 5G capex has stabilized, consistent with the valuation logic of the 4G maturity period. The report sets three scenarios: in a bull market scenario, if the enterprise 5G cycle extends and the North American RAN market does not slow down, the target stock price is 95.00 SEK (corresponding to 9.5x EV/EBIT); the baseline scenario, which is the current expectation, has a target stock price of 80.00 SEK (corresponding to 8x EV/EBIT), assuming the North American market stabilizes and EBIT profit margins remain steady; in a bear market scenario, if telecom capex declines rapidly and cash conversion rates worsen, the target stock price is 58.00 SEK (corresponding to 5.5x EV/EBIT)