Ericsson Stock Downgraded by Morgan Stanley on North America, Margin Concerns

Shares of Ericsson (STO:ERICb) fell more than 3% in Stockholm trading on Tuesday after Morgan Stanley downgraded the telecommunications equipment maker to 'Underweight' from 'Equal-weight.' The bank cited growing pressure from declining revenues in North America and profit margins falling from their peak.

Downgrade Rationale

Analysts at Morgan Stanley, led by Terence Tsui, warned of "accumulating headwinds on both revenues and costs" for Ericsson's core mobile Radio Access Network (RAN) equipment business. The bank anticipates this could lead to negative earnings revisions ahead.

The report noted that telecom operators remain conservative with their mobile capital spending. As a result, Morgan Stanley expects the overall mobile RAN market to remain flat heading into 2027, limiting growth opportunities for equipment providers.

North American Weakness and Margin Pressure

Ericsson's performance in North America, historically its most profitable region, is a primary concern for the bank. The Americas account for approximately 35% of the company's total revenue.

Key pressure points highlighted by the analysts include:

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• Network revenues from North America declined by roughly 5% year-over-year in the second quarter.
• Ericsson's third-quarter guidance points to network gross margins of 48-50%, a potential 100-basis-point decline from the prior quarter.
• Rising input costs, particularly for semiconductors, are seen as a growing headwind into 2027.

Morgan Stanley now forecasts Ericsson's gross margins will decline by about 100 basis points annually through 2028. This contrasts with consensus estimates, which project broadly flat margins. Reflecting these concerns, the bank lowered its 2027 EBIT and EPS estimates for Ericsson by 5% and 6%, respectively.

New Price Targets and Valuation

In line with the downgrade, Morgan Stanley reduced its price target on Ericsson's Swedish-listed shares to SEK 90 from SEK 95. The target for its U.S.-listed American Depositary Receipts (ADRs) was cut more significantly to $9 from $11, partly due to unfavorable foreign exchange movements.

The analysts noted that Ericsson's stock trades at 16 times earnings, above its five-year historical average of 14 times. They also questioned the stock's recent rally, which was partly attributed to a re-rating of peer Nokia, stating that "Ericsson does not have direct AI/datacenter exposure." Morgan Stanley stated it continues to prefer Nokia in the telecom equipment sector.