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Morgan Stanley has reduced Ericsson's stock rating to Underweight from Equalweight, lowering its price target from $11.00 to $9.00. The bank predicts the mobile Radio Access Network market to remain flat through 2027 as telecom operators continue to exercise caution in mobile capital expenditures. Ericsson's Network revenues from North America dropped by around 5% year-over-year in the second quarter, following a period of robust growth fueled by new contracts like AT&T's in 2024.
The company's home market, the Americas, contributes about 35% to its total revenue. Gross margins for Ericsson's Networks segment have been consistent at around 50% over the past year. However, guidance for the third quarter hints at a margin reduction of 100 basis points from the current 48% to 50%, reflecting increased input costs, notably in semiconductors, which are anticipated to intensify pressure on margins in 2027.
Morgan Stanley has adjusted its EBIT and earnings per share forecasts downward by 5% and 6% respectively due to growing concerns over margin pressure. The bank expects gross margins to decline by approximately 100 basis points per year through 2028, deviating from the consensus of flat margins. Despite trading at a P/E ratio of 11.19, higher than the 14-year average, and a PEG ratio of 0.32, suggesting potential undervaluation relative to its growth prospects, Morgan Stanley considers the stock fair value higher than its current trading price, positioning it among undervalued stocks.
The company's free cash flow yield is 9%, and its gross profit margin stands at 48.12%. Morgan Stanley favors Nokia in the telecom equipment sector due to its direct exposure to artificial intelligence from hyperscalers, whereas Ericsson remains primarily reliant on telecom capital expenditure plans. Morgan Stanley offers six additional exclusive tips for subscribers of Ericsson and provides comprehensive Pro Research Reports on this and 1,400+ other US equities.
In related news, Ericsson reported weaker-than-expected second-quarter 2026 financial results, with adjusted earnings per share at $0.1258, notably below analysts' expectation of $1.19, and revenue at $5.43 billion, falling short of the projected $5.68 billion. Despite these shortfalls, Ericsson managed to maintain stable margins and generated cash flow near its target range.
The Networks segment faced lower sales, while the Cloud Software and Services division displayed positive growth with organic expansion and a double-digit EBITDA margin. Management acknowledged ongoing operational discipline but warned of rising component cost inflation in the upcoming quarters. Following the report, BofA Securities further lowered its price target for Ericsson shares to SEK77.00 from SEK88.00, retaining an Underperform rating, citing the revenue shortfall and guidance below analyst expectations as key reasons.
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