Investing.com -- Shares of Ericsson (ST:ERICb) (BS:ERICAs) jumped on Tuesday after the Swedish telecom equipment maker posted better-than-expected third quarter results, driven by a strong performance in its networks business, particularly in North America.
At 3:47 am (0747 GMT), Ericsson was trading 9.7% higher at SEK 85.88.
The company reported a 29% headline beat in its EBITA, although much of this was due to one-off factors, including a settlement in India and higher intellectual property licensing revenues.
Ericsson’s EBITA came in above market expectations, largely supported by its strong networks business and continued cost-cutting measures.
Nevertheless, Morgan Stanley (NYSE:MS) analysts cautioned that excluding the one-time gains from IPRs and customer settlements, EBITA beats were closer to 4%.
North America was the standout performer for Ericsson in Q3, with network sales soaring by 80% year-on-year, supported by recent contract wins, including a major deal with AT&T (NYSE:T).
This marks a recovery from earlier in the year when North America saw weaker performance.
However, the company’s operations in India showed a sharp decline, with sales down 43% year-on-year in that market.
Despite the strong results, Ericsson’s outlook for the fourth quarter is slightly more muted.
The company indicated that it expects sales in its networks division to be below the seasonal average of the last three years, although gross margins are expected to improve further, in the range of 47%-49%, up from the third quarter’s margin of 48.7%.
This signals some pressure on the top line in the short term, even as profitability continues to improve.
Ericsson’s shares have been on a strong run in 2023, rising 23% year-to-date and up 45% over the last 12 months.
The stock’s recovery has been driven by improving market conditions in North America and strong cost-control measures, although challenges remain in other regions, particularly in its enterprise segment, where sales have been under pressure.
“We see signs that the overall market is stabilizing with North America, as an early adopter market, returning to growth. While the market development is ultimately in the hands of our customers, we are working to deliver operational excellence regardless of market conditions,” said CEO Börje Ekholm in a statement.
Morgan Stanley analysts pointed out that Ericsson’s results reflected both signs of growth in key markets and the benefits of one-off gains, making the underlying performance slightly less stellar than the headline numbers suggest.
They also noted that while the stock has rebounded sharply this year, risks remain, including the potential for slower telecom spending, delays in the integration of its Vonage acquisition, and ongoing regulatory investigations.
Ericsson’s future growth will likely hinge on the extended rollout of 5G, particularly in the enterprise segment, where the company sees significant long-term potential.
However, with 5G capital expenditures nearing a peak, the company’s focus is shifting toward maintaining profitability and capitalizing on new revenue streams from network APIs and cloud software services.
As Ericsson navigates these challenges, analysts are maintaining a cautious outlook, with Morgan Stanley setting a price target based on a 2026 EV/EBIT multiple of 7.5x, reflecting a discount compared to previous 4G cycles due to the maturing 5G market.