JP Morgan's outlook on Telefonaktiebolaget LM Ericsson Sponsored ADR Class B (ERIC.US) second quarter report: North American 5G investment receding and AI chip costs squeezing profits, suggesting waiting for a better entry opportunity.

Swedish telecommunications equipment giant Telefonaktiebolaget LM Ericsson Sponsored ADR Class B (ERIC.US) will release its second quarter 2026 financial report on July 14th. JPMorgan Chase maintained a "neutral" rating on the stock in their latest research report, with a 12-month target price of $11.4, suggesting that the current stock price already reflects market expectations and advising investors to wait for a better entry opportunity. JPMorgan Chase expects Telefonaktiebolaget LM Ericsson Sponsored ADR Class B to report second quarter revenue of 53.1 billion Swedish Krona (approximately $5.7 billion), slightly below the market consensus of 53.7 billion Krona; adjusted EBITA is expected to be 7.046 billion Krona, 5% above market consensus, with an EBITA profit margin expected to reach 13.3%, higher than the consensus of 12.5%. Analysts note that if Telefonaktiebolaget LM Ericsson Sponsored ADR Class B meets market expectations, the stock price may respond positively. As a key indicator of the global 5G industry, this financial report comes at a critical juncture of the industry cycle, rising supply chain costs, and management transitions. Recently, Telefonaktiebolaget LM Ericsson Sponsored ADR Class B has made breakthroughs in 5G Advanced technology and continued the implementation of a billion-dollar share buyback, injecting new disruptive variables into this Swedish giant facing industry challenges. Continued weakness in the North American market: The slowing of 5G construction is the biggest drag The North American market is the biggest challenge facing Telefonaktiebolaget LM Ericsson Sponsored ADR Class B. In the first quarter, the company's North American sales declined by mid-single digits year-over-year, and CEO Brje Ekholm has indicated a reduced reliance on the North American market in the future. JPMorgan Chase's research report points out that the main reason for the decline in North American sales is the completion of 5G deployments, with operators slowing down capital expenditure. The three major US carriers have mostly completed the transition to 5G standalone networks, and subsequent network investments have entered a "steady period." Dell'Oro data has also confirmed an overall slowdown in the RAN market. However, the market share growth at AT&T partially offset the overall decline in North America for Telefonaktiebolaget LM Ericsson Sponsored ADR Class B. The $14 billion AT&T contract won in 2023 remains an important moat for Telefonaktiebolaget LM Ericsson Sponsored ADR Class B in the North American market. Europe and India emerge as growth bright spots. In the first quarter, Telefonaktiebolaget LM Ericsson Sponsored ADR Class B's organic sales growth, excluding currency effects, was 6%, driven by Europe, the Middle East, Africa, Southeast Asia, India, and Northeast Asia markets. The company expects the European and Indian markets to drive growth in the second quarter. While the market is generally hopeful that Europe and India will become the new engines of growth, JPMorgan Chase notes that the timing of specific volume in these two regions in Q2 remains highly uncertain. AI-driven chip cost increases: A "hidden killer" of profit margins If the weak demand in North America is a drag on revenue, the rise in chip costs is a "hidden killer" of profit margins. Currently, global semiconductor and other electronic component prices are rising across sectors, directly pushing up Telefonaktiebolaget LM Ericsson Sponsored ADR Class B's hardware manufacturing marginal costs. JPMorgan Chase's research report warns: "Semiconductor and other component costs are rising across the board, potentially posing greater challenges for Telefonaktiebolaget LM Ericsson Sponsored ADR Class B." The company stated that it is managing cost pressures through cost-sharing and supply chain measures, but raising prices to customers in a downturn market environment may be challenging, and operational improvements may not be enough to fully offset pricing pressure. Although Telefonaktiebolaget LM Ericsson Sponsored ADR Class B's management has stated that they are working closely with customers and suppliers to mitigate the impact, Chief Financial Officer Carl Mellander warned that cost pressures will become more evident in the second half of the year. JPMorgan Chase predicts that the impact of cost pressures on Telefonaktiebolaget LM Ericsson Sponsored ADR Class B's profit margins will be more pronounced in the second half of the year. Positive factors: Resilient profitability, shareholder returns, and 6G deployment Despite the challenges, Telefonaktiebolaget LM Ericsson Sponsored ADR Class B shows a certain resilience in profitability. Maintaining high gross margins. In the first quarter, the adjusted gross margin for the Networks business was 50.4%, within the company's guidance range of 49% to 51%. The company expects the business's gross margin to remain in the same range in the second quarter. JPMorgan Chase predicts a second-quarter group gross margin of 47.9%, in line with the market consensus. Increasing shareholder returns. The company has announced an increase in its annual dividend to 3 Krona per share and initiated a 15 billion Krona (approximately $1.67 billion) share buyback plan. As of the end of the first quarter, the company's net cash balance reached 61.2 billion Krona. The buyback plan began in late April. 6G and AI-RAN deployment. Telefonaktiebolaget LM Ericsson Sponsored ADR Class B expects 6G to enter commercial use in 2030 and has strategic partnerships with Apple Inc., MediaTek, and others. The company has introduced AI-ready wireless devices and integrated them with self-developed chips featuring programmable neural network accelerators. New technologies like Cloud RAN and AI-native networks are expected to provide new momentum for medium-term growth. The company expects the global RAN market to remain flat in 2026, but with confidence in outpacing industry growth due to its positioning in mission-critical and enterprise markets. Core variables driving profit performance Seasonal recovery in networks and software: Although revenue forecasts are slightly below consensus, Networks business is expected to grow by 4.2% sequentially, basically in line with the industry's seasonal pattern of 4%. Cloud Software & Services, due to seasonal volume increases, is expected to see a sequential increase of 15.8%, showing a good recovery trend. Long-term blood-making effect of Intellectual Property Rights (IPR): Telefonaktiebolaget LM Ericsson Sponsored ADR Class B has continued to make stable contributions with a long-term cross-licensing agreement reached with a leading Chinese manufacturer in the first quarter of 2025. Official guidance indicates that the annual operating revenue of the IPR business will remain stable at 13 billion Swedish Krona. Weak tailwind from a strong dollar: In the second quarter performance guidance, Telefonaktiebolaget LM Ericsson Sponsored ADR Class B's official assumption for the USD/SEK exchange rate is 9.2. However, the actual average rate in Q2 reached 9.35. After quantitative calculation, JPMorgan Chase believes that this potential exchange rate difference will provide an additional 0.9% tailwind boost to Telefonaktiebolaget LM Ericsson Sponsored ADR Class B's total revenue in Q2. Valuation and prospects: waiting for a better entry opportunity JPMorgan Chase believes that the best time to buy Telefonaktiebolaget LM Ericsson Sponsored ADR Class B stock is "when it is not popular in the market," which is not the case currently. Over the past decade, Telefonaktiebolaget LM Ericsson Sponsored ADR Class B's valuation range has been between 12 times and 19 times forward price-to-earnings ratio, with a median of 15 times. JPMorgan Chase uses a 14 times 2027 expected earnings per share as the valuation benchmark, giving a target price of 102 Krona, which may be somewhat conservative. As of July 8th, Telefonaktiebolaget LM Ericsson Sponsored ADR Class B's US ADR was trading at around $11.04, with the Swedish stock price around 106 Krona. The Swedish stock price has risen by about 19% year-to-date, but has fallen by about 12.8% in the past month. From a capital market game perspective, due to investors' concerns about the transition of traditional mobile communication network construction to a stock phase, short positions and pessimism have been relatively well priced in. JPMorgan Chase notes that if Telefonaktiebolaget LM Ericsson Sponsored ADR Class B can meet market expectations in the July 14th financial report, its stock price could experience a positive short-term rebound driven by short covering. However, from a longer-term perspective, the optimal entry point for Telefonaktiebolaget LM Ericsson Sponsored ADR Class B stock often occurs in the market's low point of lack of consensus. Currently, as the large-scale commercial period for the next generation 6G technology has not yet been seen, traditional RAN hardware upgrades are difficult to attract high premiums from operators in the short term. Overall, analysts recommend that investors remain cautious before a thorough turning point in industry demand emerges, and they do not blindly chase highs before the Q2 financial report, but patiently wait for a more cost-effective bottom-building phase brought on by macro disturbances.