Ericsson flags rising AI-driven cost pressures, shares fall nearly 12%
AI Demand Drives Up Costs and Impacts Ericsson's Financial Performance
By Supantha Mukherjee
STOCKHOLM, July 14 (Reuters) - Swedish telecoms equipment maker Ericsson warned on Tuesday that it was under pressure from rising memory chip costs driven by surging AI demand, fanning investor worries that margins would be hit and sending its shares tumbling nearly 12%.
The stock hit its lowest level since February and was on track for its biggest one-day drop since early 2025 as investors looked past a narrower-than-expected fall in second-quarter core profit.
AI Build-Out and Memory Chip Shortages
The build-out of AI data centers globally has led to a shortage of memory chips used in smartphones and computers, pushing companies such as Apple to raise prices of their products. Ericsson's warning shows that the impact might spread to other sectors.
Industry-Wide Pressure and Ericsson's Response
"The whole AI build-out is putting quite the pressure on the whole industry, including us," CFO Lars Sandström told Reuters.
Ericsson said it was under pressure as the global AI build-out hits suppliers, but there was limited financial impact in the second quarter due to its resilient components supply chain.
Analyst Insights and Mitigation Strategies
Jefferies analysts said that "steadily rising component prices" could have a bigger effect on the fourth-quarter gross margin, depending on moves taken to mitigate increases.
Outgoing CEO Borje Ekholm said the company would continue to pursue internal measures and pricing actions to help offset the effect in the coming quarters.
"We are taking near-term actions across the businesses, including commercial measures, for example, product substitution, as well as supply chain actions and targeted cost initiatives," Ekholm said on a conference call.
Besides memory chip prices, the AI boom is also affecting custom chips the company uses in building telecom infrastructure.
Financial Results and Market Sentiment
Lower Margins and Higher Costs
LOWER MARGINS, HIGHER COSTS HIT SENTIMENT
High margins from some businesses helped beat analysts' expectations, but the company has seen lower sales at its mainstay mobile equipment business in key markets such as North America.
Quarterly Sales and Profit Figures
Quarterly net sales fell 6% from a year earlier to 52.7 billion crowns ($5.5 billion), lagging the LSEG poll estimate of 53.6 billion crowns.
Net sales at Ericsson's high-margin network business, the biggest revenue generator, fell 8% in the quarter, but the company expects growth to exceed seasonality in the third quarter.
Ericsson reported a fall in adjusted operating profit to 6.52 billion crowns for the second quarter, slightly beating analysts' average expectation of 6.42 billion, according to an LSEG poll.
Analyst Commentary on Market Impact
"We believe the combination of slowing revenue growth, lower gross margins, and increasing component cost inflation is likely to weigh on sentiment and put pressure on the shares today," UBS analysts said in a note.
($1 = 9.6225 Swedish crowns)
(Reporting by Supantha Mukherjee in Stockholm; Editing by Terje Solsvik, Jacqueline Wong and Emelia Sithole-Matarise)
