The AI buildout has resulted in an unanticipated casualty distant from Silicon Valley: telecom equipment manufacturers, who now compete with hyperscalers for the same memory chips. Three major companies, SK Hynix, Samsung, and Micron, control more than 95% of worldwide DRAM production, and as AI data centers use an increasing share of that output, memory chips used in telecom base stations become scarcer and more expensive as a direct result. That is the mechanism behind Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC)’s worst single-day stock reaction in nearly three years.
Q2 Execution vs. Guidance Friction
The company’s shares plunged about 12% on July 14, reaching their lowest level since February, after Ericsson warned that growing component costs, particularly memory chips, will affect margins in the future. Looking into Ericsson’s Q2 2026 results, the market’s harsh reaction was more about forward guidance rather than a breakdown in existing operational execution. Adjusted EPS was SEK 1.22 (~$0.13), which was in line with market expectations. Adjusted gross margin increased to 48.4%, a two-percentage-point year-over-year rise after normalizing for a prior-period IPR licensing settlement. Meanwhile, reported net sales declined 6% to SEK 52.7 billion ($5.62 billion), missing the SEK 53.71 billion forecast, while organic sales excluding currency and one-offs remained essentially flat.
What worried investors was guidance and cash flow, not the print itself. Free cash flow before M&A fell to SEK 0.4 billion from SEK 2.6 billion a year ago, owing to increased inventories being accumulated ahead of scheduled third-quarter deliveries. Management forecasted Q3 Networks adjusted gross margin to a range of 48% to 50%, a slight decrease from Q2 levels, noting a higher share of lower-margin network rollout projects and component inflation developing “gradually” during the second half of 2026 and into 2027.
Jefferies, which rated the stock at a Hold with a target price of 98 Kronor, framed the sales miss as being centered primarily on delayed India deliveries within the Networks division as opposed to broad-based demand weakness, and noted Ericsson is forecasting a stronger-than-seasonal third quarter as those delayed deliveries arrive.
The Valuation Gap
The sudden selloff has generated an attractive valuation gap for long-term investors. Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) is currently trading at a 14.45x forward P/E multiple, representing a significant discount to key infrastructure rivals such as Nokia, which trade on similar 5G-cycle and edge-connectivity theses. The market’s knee-jerk reaction appears to regard temporary component inflation as a permanent weakening of Ericsson’s earnings potential, resulting in a clear disparity between price and underlying value.
Short interest and hedge fund positioning support a bullish counter outlook. Short interest in Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) sits at a modest 2.1% of the float, suggesting bears aren’t piling into short positions to bet on further structural downside. In addition, notable hedge fund managers were gathering shares ahead of the company’s results. According to Insider Monkey’s Q1 2026 database, 19 hedge funds had long positions in ERIC as of the end of the quarter, versus 15 funds in Q4 2025.
Insider Monkey’s Verdict
Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC) is experiencing a manageable, short-term margin headwind from AI-driven memory chip competition, rather than a fundamental weakening of its cellular network trademark. With core gross margins holding strong and inventory accumulation preparing the company for a comeback in Q3 deliveries, the 12% drop marks an appealing entry point.
While we acknowledge the risk and potential of ERIC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ERIC and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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Disclosure: None.
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