The Zhitong Finance App learned that the three-quarter report handed over by Ericsson (ERIC.US) on October 15 is beautiful in terms of numbers: it reported sales of 59.5 billion SEK (56.2 billion in the same period last year), organic sales increased 7% year over year, and three of the four market regions achieved organic growth, mainly driven by Networks.
However, in the October 20 research report, Deutsche Bank split this beautiful thing into two layers. The first tier is share: Ericsson's position in the RAN market “continues to grow”, while rival Nokia chose to prioritize profit protection. Ericsson clearly gained share in markets such as Japan (for example, through NTT Docomo). The second level is composition: The company itself admits that part of this quarter's strength came from “strategic customers pull goods early” — customers moved forward with purchases just before prices rose.
When these two are layered together, this is the full meaning of the title “Delivering in Supply” given by Deutsche Bank: More orders placed today may be fewer orders tomorrow.
Three growth drivers, one of which is one-off
At the French conference, the company attributed this quarter's growth to three things: customer demand in strategic markets, early customer delivery before anticipated price increases, and tactical commercial actions aimed at rising semiconductor costs. When asked by analysts “how big is early delivery”, Chief Financial Officer Lars Sandström gave only a qualitative sentence: “Yes, but not super big,” and drew his attention back to a longer range — Networks' sales growth of about 4% from the beginning of the year to date.
Deutsche Bank's approach is to keep this limitation in its entirety: it endorses the judgment to increase its share, and at the same time indicates that “part of this quarter's strength was boosted by early delivery.” In other words, how much of 7% will last until 2027, the company didn't say, and Deutsche Bank didn't count it.
The 2027 cost headwind: the company did not quantify it; Deutsche Bank itself gave a number
What really discourages this financial report is the forward-looking guidance. Management clearly indicated that 2027 will face headwinds of component cost inflation, which may affect profitability. CEO Per Narvinger's original words were: “We can't stay out of the situation”. The industry is entering a period of rising investment costs, and tactical methods — product replacement, upgrade sales — “cannot be sustained for a long time,” and structural price increases must be implemented gradually by renewing contracts.
However, the company did not give a specific level of impact on gross margins. When analysts asked “what will happen to gross margin in 2027 if hedging measures fail,” Narvinger declined to give numbers, admitting only that memory costs for the server business alone are rising, and that without countermeasures, it would cause “significant dilution.”
As a result, Deutsche Bank filled in a number for itself: it predicts that Networks' gross margin will drop by 200 basis points year over year in 2027. It also lists three mitigation paths that need to be continuously tracked — price negotiations, memory downsizing, product replacement, and emphasizes that in the absence of company quantification, it is necessary to simultaneously focus on the actual impact of the bill of materials (BOM) and the room for progress in mitigation actions.
“Just in case” stocking up: Echoes of 2021-22
The third clue is inventory. Deutsche Bank has observed that Ericsson is clearly shifting to a “just in case” inventory buffer strategy to ensure continuous supply in an environment of tightening supply.
Deutsche Bank's comments on this move are cautionary: there are “clear echoes of the 2021-22 chip shortage”, and that one time eventually turned into a long whip effect. Stocking can guarantee delivery, but it will also amplify subsequent demand fluctuations — this is the only historical analogy that Deutsche Bank actively lengthens in the text.
The new CEO's trifecta: slimming down, merging, and breaking up the corporate business
Narvinger took over this quarter, and Deutsche Bank's assessment was that it “quickly left a mark”. Three things:
Organizational structure slimmed down: The number of members of the executive committee was reduced from 14 to 12; the two market regions of Northeast Asia, Southeast Asia, Oceania and India were merged into one “Asia Pacific” market area. It will operate from January 1, 2027, and is headed by Patrick Johansson, the current head of Europe, Middle East and Africa. The number of regions was reduced from five to four.
Split Enterprise Wireless Solution (BEWS): This long-stressed business was disbanded, and assets were spun off elsewhere — Neutral Host (Neutral Host) and Ericsson's private 5G merged into Networks in exchange for stronger R&D collaboration; wireless WAN (or Cradlepoint) remained an independent subsidiary and reported to Yossi Cohen, head of the Americas region.
Deutsche Bank's interpretation of this step is quite straightforward: incorporating private 5G and indoor solutions originally expected to use Cradlepoint's corporate channels into Networks itself “points to channel conflicts with operators,” and players like Celona have the upper hand in corporate 5G. It makes up for a contrast — Nokia also recently sold its Enterprise Campus Edge (ECE) business to Aurelius and left this area.
Vonage's loss reversal: After the company's business was adjusted this season, EBITA still lost about 500 million kroner, and the task of the new head, Christophe Van de Weyer, was defined as “growth+aggressive cost reduction.” Narvinger said, “Growth alone is seldom successful; we have to look at the cost side.”
Why the sudden increase in the interior: SpaceX bought $8 billion spectrum
Deutsche Bank linked the disposal of BEWS to another external clue: Ericsson is clearly increasing its investment in indoor scenarios. The background is that SpaceX recently took over the terrestrial spectrum (800 MHz) in the US for 8 billion US dollars, and its ambition is to achieve a seamless connection between indoors and outdoors.
The judgment of the Deutsche Bank America Telecom team is that SpaceX is more likely to use a “small base station+satellite” hybrid architecture and is unlikely to rely on large-scale construction of a macro base station. This judgment determines whether this clue is an opportunity or a threat to Ericsson — if the opponent takes the small base station route, Ericsson's traditional macro station advantage may not be used, and indoor and edge capabilities will become a new point of contention.
Valuation: The target price did not change, but the anchor was replaced
Deutsche Bank maintains a “hold” rating and a target price of 100 kroner. The reason is that, although there is room for improvement in recent earnings, the 2027 and 2028 EPS forecast is “almost unchanged” (an increase of about 2%), so there is no basis for adjusting the target price.
One technical change in the valuation method is worth noting: the target price now corresponds to 6.9 times the 2028 EV/EBITDA forecast (previously the 2027 forecast) is still far below the 14.5 times that Deutsche Bank gave Nokia. The reason is that Ericsson has greater exposure to mobile networks, and Nokia has more opportunities to grow in network infrastructure. The target price is also equivalent to 12 times the expected price-earnings ratio for 2028, and is supported by segment summation (SOTP): Networks worth 210 billion kroner, Cloud Software & Services worth 81 billion kroner, and Enterprise worth 19 billion kroner.
There are four risk items on the list: operator capital expenditure, pricing pressure, component cost inflation, and corporate business trends. The upward risk is taking shares from Chinese manufacturers due to continuity or geopolitical considerations — Deutsche Bank specifically points out the “continuity” dimension. Furthermore, the exchange rate is highly sensitive and is an independent variable.
Summarize Deutsche Bank's attitude in one sentence: the quarter was good, the share is real, but there is a one-time component of growth, there is a cost headwind next year, and the current price of 104.85 kroner is already above the target price of 100 kroner — these are all reasons why it “holds” rather than “buys.”