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U.S.-Chinese tensions have run high ever since Trump laid out plans to counter unfair trade practices from China in 2016.
These tensions have rippled across almost every industry, but almost none as prevalent as in the telecom industry. This is a war against Chinese company Huawei, the world's largest provider of telecommunications equipment and a leader in next-generation 5G technology.
Now, this is not exactly a new conflict with Huawei, but this could be the biggest one yet as one of the largest telecom equipment upgrades in history is taking place right now with 5G. Taking a step back, issues with Huawei go all the way back to 2003, when Cisco Systems Inc. (NASDAQ: CSCO) sued the company over theft of its technology. This was over several patents, which Cisco eventually won.
Here are just a few of the conflicts over the years:
2004: Huawei employee caught spying at a trade show.
2008: Leaked documents show Huawei secretly helped North Korea build its wireless network.
2009: Accused of corporate espionage after Huawei employee tries to extract data from an Indonesian mobile operator.
2012-2017: Huawei-installed technology at African Union headquarters was reportedly hacked for five years.
I think you get the picture. It's no wonder the United States, and now the rest of the world, is looking to cut Huawei out of its telecom networks.
The United States officially banned Huawei when Trump signed an executive order in May 2019, and now this week, the United Kingdom has followed suit and banned Huawei from its 5G networks. On top of that, London is calling for the removal of all Huawei equipment by 2027. The United States and UK are not the only two countries that have banned Huawei either. Dozens of others have also done so, including Telecom Italia excluding Huawei from bidding on its 5G network project in Brazil.
But this isn't just geopolitical hardball. It's an opportunity for investors.
5G is one of the biggest tech investing opportunities you'll ever see, and one of the leading companies is being barred from the biggest markets in the world.
And the companies that step in to fill that void could have explosive upside…
These Top 5G Stocks Will Pick Up Huawei's Slack
As always, every restriction on Huawei opens potential doors for key rivals. And here are two of the companies that could benefit the most.
Nokia (NYSE: NOK)
When it comes to introducing 5G technology, Nokia has a full end-to-end network portfolio. It is in the process of a major turnaround strategy, and with its new CEO, Pekka Lundmark, at the helm, efforts to revive its faltering 5G business are top of mind.
For Q1, 2020, Nokia's 5G win rate, excluding China, continued to be over 100%, a great sign moving forward. As of the end of the quarter, it also had 70 5G deal wins and 21 live networks deployed.
As 5G networks continue to grow across the world, physically upgrading existing tower radios can get expensive. Especially during the pandemic, where labor could be short-handed. Nokia has released an alternative in some instances, where 4G infrastructure can be upgraded via software. According to Nokia, the software update is available now for 1 million 4G radios and will triple by the end of the year. While this is not adding new frequencies to the radios, it is helping to reassign existing frequencies to 5G networks.
As the second largest owner of 5G standard essential patents with over 3,000 patent families as essential for 5G, Nokia could be set to capture more of the multibillion-dollar 5G market.
Ericsson (NASDAQ: ERIC)
As mobile network providers must carry out upgrades to cope with the increasing demand for faster and better wireless networks, Ericsson is set to provide its equipment.
Much like Nokia, the number of 5G contracts continues to grow. At the end of last quarter, Ericsson signed 86 commercial 5G contracts and delivered 29 live networks. It should continue this strong momentum given its heavy investment in R&D for its cloud-native portfolio and radio access network products, a key piece of equipment to implement 5G mobile services. In January, it announced a new R&D site to employ up to 300 people with an initial focus on 5G software development. This brings its R&D centers up to 18.
Ericsson is well positioned after delivering a solid Q1 and keeping financial targets for 2020 and 2020 intact. Gross margins saw significant improvement year over year going from 38.5% to 40.4%, and its net cash position is $3.9 billion. This should set it up well for the rest of the year even if pandemic restrictions continue to be upheld.
But the opportunities in 5G don't end there.
You see, there's a key reason why there hasn't been a nationwide rollout yet.
5G was following in the footsteps of the 10 years it took 4G to roll out, but the FCC just stepped in with a $10 billion initiative to supercharge 5G.
About the Author
Alex Kagin is the Director of Technology Investing Research at Money Map Press. He has spent the last decade working in equity research, most recently with Energy Capital Research Group (ECRG), where he led technology stock research along with working as part of a team developing a customizable financial data platform for securities analysis.
Prior to joining ECRG, Alex spent 8 years at DeMatteo Research, a boutique primary research firm and broker-dealer servicing the institutional investment community. He managed the Tech, Media, and Telecom vertical where he spent time connecting with hundreds of tech executives and hedge funds to get the pulse of the market.
Alex has a B.S. in Economics from American University and previously held Series 7 and 63 security licenses.