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Ericsson develops and manufactures network equipment and software, as well as services for network and business operations. The company's portfolio includes products for vast markets, including the enterprise, cable, mobile platform, and power module markets.

Investment case
Today’s telecommunication systems (fixed, mobile, internet, computing) are going to be disrupted at some point. Examples of industry changes and the speed at which they occur can be gauged by the following figures:

• Market opportunity: Between 2006 (pre-iPhone time) and now the handset market has grown from almost nil to USD 260bn; this trend is expected to continue.
• Number of potential users: The number of Internet users has grown from almost zero to 3 billion users worldwide in less than 20 years; and is still estimated to grow.
• Volume: The ever growing number of applications will require higher traffic capacity. It is estimated by 2020 the traffic will have doubled from present levels.
• SaaS market: The SaaS market model will become dominant and as a result it will require higher cloud capacities.
• Price: The price decline observed in the last 50 years has been tremendous. In 1969 the price of the fastest computer was USD 32 million (adjusted to today’s USD value), while today an iPhone 4 sells for about USD 135.

The “cloudification” of network infrastructure is accelerating and is leading to a disruption in the telecom equipment sector. Cloud technologies will be particularly disruptive in sub-sectors such as telecom equipment providers and data centers. The new emerging business models are Software Defined Networks (SDN) and Network Functions Virtualization (NFV). While the first creates networks which adapt to fast innovation, the second, reduces CAPEX, OPEX, space requirements, and power consumption. In the future, scalability and ease of deployment will be key elements to operators because, on average, cloud capacities double every 18 months.

During the past few years, Ericsson has been constantly investing and pursuing a growth strategy, through both acquisitions and organic growth. The company is one of the cheapest big-caps in the sector (6.6 EV/EBITA).

Revenue/business triggers

• For the next 5 years, network virtualization sales are conservatively estimated to grow at the rate of 13% per year,
• The market is moving to higher value products (exit modem),
• The constant increase in online traffic will require operators to renew and add capacity on a regular basis, at present CAPEX processes are lagging and some catch-up is expected, 
• Internet located service models currently represent 8% of market volume, any higher volumes will trigger supportive business prospects for Ericsson,
• A return to the historic operating margin (e.g. 14%, presently 11%) could trigger a plus 40% re-evaluation of Ericsson’s equity price.