Morgan Stanley turns bearish on Ericsson, prefers Nokia

The investment bank's price target, set beneath the current share price, indicates it expects further declines, not just a temporary slowdown. Its margin predictions, lower than the market consensus, suggest that earnings downgrades could spread across the industry. The downgrade reflects a belief that telecom operators will not increase mobile network spending soon, which is bad for all radio equipment suppliers, though the bank's preference for Nokia shows it sees a better position. Higher semiconductor costs introduce a risk that may affect other hardware companies relying on components. Ericsson's upcoming third-quarter results will serve as a check on whether the margin pressure is already happening.

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According to Morgan Stanley, Ericsson's peak margins are likely over, as North American expansion slows and semiconductor expenses increase in a stagnant market.

The note's key points are as follows:

• Morgan Stanley lowered its rating on Ericsson to underweight from equal weight. It cut the Stockholm-listed share price target to SEK90 from SEK95 and the US ADR target to $9 from $11. The stock fell over 3% to roughly SEK97 after the announcement.
• The bank forecasts the mobile radio access network market will remain unchanged through 2027, as operators maintain strict capital expenditure.
• In the second quarter, Ericsson's network revenue in North America dropped roughly 5% compared with a year ago, following years of robust growth. The Americas contribute around 35% of total group sales.
• Morgan Stanley predicts gross margins will decline by approximately 100 basis points annually through 2028, contrary to the market consensus of stable margins. It blames project mix and increasing semiconductor prices.
• The bank reduced its 2027 operating profit forecast by 5% and earnings per share estimate by 6%. It also stated it favors Nokia over other telecom equipment producers.

On Tuesday, shares of Swedish telecom equipment firm Ericsson dropped over 3% following Morgan Stanley's downgrade from equal weight to underweight. The bank warned that declining revenue in North America and margins that have peaked might pressure earnings.

Morgan Stanley reduced its price objective for the Stockholm shares to SEK90 from SEK95, which is beneath the around SEK97 trading level after the announcement. For the US-listed shares, it lowered the target to $9 from $11. The larger reduction for the US target was partly due to unfavorable foreign exchange changes since the prior update.

The core of the downgrade is a weak view of Ericsson's main business. Morgan Stanley anticipates that the worldwide market for mobile radio access network equipment — the gear that links phones to networks — will stay unchanged until 2027, as telecom firms curb capital spending on mobile.

North America, previously a strong area, is now slowing. Ericsson's network revenue from that region slid about 5% year over year in Q2, after years of expansion driven by market share wins, including a significant contract with AT&T in 2024. The Americas represent about 35% of group revenue.

Margins present another worry. Ericsson's networks unit has had gross margins near 50% in the past year, but its Q3 guidance indicates a 48%-50% range as certain projects shift to lower-margin deployment stages. Morgan Stanley noted that increasing input costs, especially for semiconductors, will likely become a larger obstacle in 2027. The bank expects gross margins to drop about 100 basis points each year until 2028, whereas the market sees them staying roughly stable. It cut 2027 operating profit and EPS forecasts by 5% and 6% respectively.

Valuation also gives reason for caution. The analysts pointed out that Ericsson trades at 16 times earnings, higher than its five-year median of 14 times, and said they still prefer Nokia in the telecom equipment space.

Morgan Stanley is not the only bear on Ericsson. BofA also rates the stock underperform and cut its target to SEK77 after Ericsson missed second-quarter revenue estimates and issued softer guidance.

The third-quarter results will be the next important indicator of whether the revenue and margin strain Morgan Stanley expects is beginning to emerge.