Investors are largely focused on the novel coronavirus. The pandemic has set in motion sweeping societal change and many associated economic trends. However, don’t lose sight of the other key developments. While everything else has taken a backseat to the pandemic for now, astute investors can still cash in as technology progresses. For example, while it’s not the leading story at the moment, day by day, the global 5G dream is becoming a reality. And as I’ll show you, Ericsson (NASDAQ:ERIC) stock is riding in the sweet spot of this boom.
The company is a 5G powerhouse. It has already obtained 86 commercial contracts and has constructed 31 live 5G networks. To that point, Ericsson announced successful 5G service launches in Madagascar and Taiwan this past week alone.
The company has been spending heavily on research and development to solidify its leadership position. But at the same time, it has been paying down its debt levels to strengthen its balance sheet. In the past, some customers feared ordering from Ericsson because of its flimsy financial position. However, Ericsson has made key cost-cutting moves to ensure its long-term durability, and both its credit outlook and share price have moved sharply higher in response.
That’s not all.
Ericsson Wins as U.S. Cuts Ties With China
Ericsson is gaining attention as a leading Western competitor to China’s Huawei. Trade relations between the U.S. and China have soured, with data security being a particularly sore point. In fact, Attorney General Bill Barr went so far as to suggest the U.S. government should purchase a large stake in Ericsson to protect Western telecom networks from foreign interference.
And the breach between the United States and China only grows wider. On Tuesday, June 30, the Federal Communications Commission issued a forceful declaration against Chinese 5G suppliers. The FCC will not spend money on Huawei and ZTE communications equipment. This means that the Chinese vendors will not have access to the FCC’s $8.3 billion per year universal service fund that it uses for key infrastructure needs.
Additionally, FCC Chairman Ajit Pai minced no words in describing the relationship with China. Pai said: “Both [Huawei and ZTE] have close ties to the Chinese Communist Party and China’s military apparatus, and both companies are broadly subject to Chinese law obligating them to cooperate with the country’s intelligence services … We cannot and will not allow the Chinese Communist Party to exploit network vulnerabilities and compromise our critical communications infrastructure.”
As an investor, the message is clear: Ericsson and Nokia (NYSE:NOK) will be getting the U.S. government’s 5G business. Don’t forget that the U.S. has been urging its allies to stop buying Chinese gear as well. There will be a huge swing in telecom equipment market share going forward. And this will be a strong catalyst for ERIC stock moving forward.
Fixed Wireless Access: A Key Ericsson Strength
Fixed Wireless Access (FWA) connections, a particular strength of Ericsson, are on track to boom as part of the global 5G rollout. In a recent mobility report, Ericsson highlighted the findings of a study that it ran with 309 different mobile service providers. Ericsson found that 185 of these now have a FWA offering, and that this figure has nearly doubled since 2018.
Additionally, Ericsson estimates that mobile service providers offered 51 million FWA connections at year-end 2019. It believes that this will grow to 160 million over the next five years. And FWA data traffic will rise from 15% of the global total to 25% of it over the next five years.
As you can see, this is a large and rapidly increasing chunk of the global data market. And it gives Ericsson a key niche where it dominates. This offers ERIC stock investors a fallback option, even if Huawei manages to overcome its political obstacles and get back into the game. Either way, Ericsson has retained a strong competitive position, even while the market may have felt that the Chinese competitors had obtained a decided advantage.
ERIC Stock Verdict
Admittedly, the 5G rollout story has lost some near-term momentum. For one, the pandemic has hurt telecom companies’ budgets, and also disrupted supply chains. And underwhelming early deployments in places such as South Korea lowered expectations a notch or two. However, the need to modernize our data networks remains as high as ever. In fact, with more people working and shopping from home, mobile usage is only heading higher. Ericsson will be there with the gear to make it possible.
We could be at an inflection point for the investment story in ERIC stock. Not just the FCC is cracking down on Chinese equipment gear. In Congress’ $1.5 trillion infrastructure bill, which it passed Wednesday, July 1, the law would forbid spending on any goods made by Chinese state-owned enterprises. While it’s unclear when the Senate will approve the bill, it’s possible that we could see a flood of money deployed that will, in part, fund more internet infrastructure build-out using Ericsson equipment.
More broadly, Ericsson is at the right place at the right time. Governments are spending money to try to get their economies up and running again. And due to the quarantine, mobile networks are now a top priority. With Chinese manufacturers sidelined, Ericcson has a golden opportunity to cash in on these trends.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.
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