Shares of Ericsson (ERIC) dropped 10% today after announced earnings, according to Wall Street the company has missed expectations for 2021’s second quarter.
Net income in the June quarter was $436.8 million or 14 cents per share compared to the prior-year quarter. The improvement was primarily driven by higher EBIT (earnings before financial items and income tax). The bottom line, however, missed the Zacks Consensus Estimate by 1 cent.
Ericsson is well positioned to cash in on the market momentum with its competitive 5G product portfolio. However, the company projects a substantially lower market share in China and possibly losing ground to Nokia. It had already warned that Sweden’s decision to exclude Chinese vendors from Swedish 5G networks might adversely impact its business in the East Asian country.
Ericsson snags Verizon (VZ) on $8.3 billion agreement
Ericsson expanded its long-standing partnership with Verizon with an $8.3 billion, multi-year deal. The company will provide its industry-leading 5G solutions to accelerate the deployment of the service provider’s 5G network in the United States.
The deal mainly focuses on radio access network (RAN) equipment. In today’s second quarter 2021 earnings call Ericsson’s CEO Börje Ekholm said the multi-year deal with Verizon is the largest contract in the history of Ericsson.
Under this new $8.3 billion agreement, Verizon will deploy Ericsson’s 5G solutions in its Ultra Wideband 5G network. Those solutions include Ericsson’s Radio system portfolio, Massive MIMO, Ericsson Spectrum Sharing and Ericsson Cloud RAN.
Beware: A big problem in China
The price of Ericsson fell mainly because of it’s problem with China, the world’s largest and fastest growing tech economy in the world. In short, Ericsson has found itself caught in the middle of a geopolitical spat between China and the West over the future of 5G networks.
Its home country, Sweden, has bowed to pressure from the U.S. and allies to ban rival Huawei over national security concerns that center on giving a company with ties to the Chinese regime access to critical technology infrastructure.
China has threatened to retaliate against Ericsson in a tit-for-tat move over Sweden’s treatment of Huawei. In May, Chinese state media said that Beijing would give Sweden one last chance to reverse the ban before Ericsson would take a hit in the next round of China’s massive 5G build-out.
Ericsson said it was “prudent to forecast a materially lower market share in mainland China for networks and digital services.” That puts it mildly. As long as Ericsson remains caught in the middle of geopolitical tensions between Sweden and China, investors shouldn’t be surprised to see the company keep losing contracts, and market share which is why Nokia should be on your watchlist.