Ericsson Shares Dip After Goldman Sachs Downgrades Rating

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Ericsson Shares Dip After Goldman Sachs Downgrades Rating
Credit: © Reuters.

By Scott Kanowsky -- Shares in Ericsson (ST: ERICb ) fell in mid-morning European trading on Monday after Goldman Sachs analysts downgraded their rating of the Swedish telecommunications company in the wake of disappointing third-quarter earnings .

In a note to clients, the analysts moved the rating down to neutral from buy, citing decreased "visibility" over future profits at the business' cloud software and services segment, as well as concerns over potential pressure on core income margin.

Meanwhile, they noted uncertainty around Vonage, the cloud-based services business Ericsson bought in its biggest-ever transaction in a bid to boost its offerings to companies and developers. Ericsson reported that selling costs related to the $6.2B acquisition rose in the third quarter, weighing on margins.

Ericsson also faces possible financial penalties related to an admission earlier this year that it broke an agreement to hand over details about alleged bribery in Iraq to U.S. regulators. The Goldman Sachs analysts flagged that the timing of the resolution of this case remains unclear.

The brokerage subsequently scaled back its 12-month price target for Ericsson to SEK 68 from SEK 123.

"[W]e believe the market will need to see proofpoints indicating clear synergies for the acquired Vonage deal, and resolution of outstanding regulatory issues, in order to attribute a higher valuation," they said.

Last week, Ericsson posted quarterly earnings before interest, taxes and amortization that dropped by 18% year-on-year to SEK 7.6B, missing estimates, as an uptick in group net sales failed to offset increased investment in research and development and a large one-off expense.

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