What’s Next For Ericsson’s Stock Post Q1 Results?

Ericsson (NASDAQ: ERIC) recently reported better-than-expected first-quarter results, with sales totaling SEK 55 billion, representing a 3% year-over-year (y-o-y) growth. A key highlight was a robust 20% rise in sales in North America, which helped offset declines in other major markets. The company also saw a notable improvement in profitability, with adjusted gross margins increasing to 48.5% from 42.7% a year earlier, driven by a higher proportion of sales from the U.S., considered a high-value market. Segment-wise, Networks sales rose 6% to SEK 36 billion, Cloud Software and Services remained steady at SEK 13 billion, while Enterprise sales dipped slightly by 1% to SEK 6 billion. Adjusted core earnings, excluding restructuring charges, surged 44% year-over-year to SEK 6.2 billion in Q1.

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Image by Kurniadi Ilham from Pixabay

What’s Next?

For the second quarter of 2025, revenues from the Networks, Cloud Software and Services segment are expected to align with the typical seasonal trends observed over the past three years. The gross margin for the Networks segment is projected to remain strong, ranging between 48% and 50%, supported by favorable product and market mix and cost reductions. Amortization of intangible assets is forecast at approximately SEK -0.5 billion per quarter, with the majority, around SEK -0.4 billion, attributed to the Enterprise segment. Additionally, restructuring charges are anticipated to remain elevated, indicating continued transformation efforts within the organization.

Tariff Impact: Ericsson noted that tariffs are currently reducing margins by one percentage point. Nonetheless, its globally diversified production across the U.S., South America, Europe, and Asia provides some resilience. Despite a 4% FX headwind, management anticipates normalized Q2 seasonality, driven by a favorable high-margin product mix and retroactive intellectual property rights (IPR) payments. However, ongoing tariff risks and potential inventory build-ups add uncertainty and could further pressure margins if conditions deteriorate.

Regional Trends: North America remains the primary growth driver, while Europe and parts of Asia are showing signs of stabilization following elevated activity. Investment in these regions is expected to normalize. Competitive pressure from Chinese vendors remains balanced, with market share shifts outside North America largely offsetting one another.

Network Modernization:  Deployment of programmable networks is progressing, with early API revenues emerging in key markets. Meanwhile, 5G standalone adoption is expected to grow steadily as operators enhance mid-band infrastructure.

Despite a tariff-related sell-off in broader markets, ERIC stock remains up 3% year-to-date. This suggests investors have been seeking defensive plays amid the current economic uncertainty. We estimate Ericsson’s Valuation to be $8 per share, almost inline with current levels. Our forecast is based on 15x forward expected earnings of $0.54 per share.

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