The Drama You’re Not Watching but Should Be

Governments around the world are banning Huawei products — why that could be good for some 5G investors

There’s a drama in the news right now, yet odds are you’re not paying it much attention.

But how this situation unfolds may create an opportunity for a select group of companies to receive an unexpected windfall of profits … all related to a major trend which will affect you and me over the coming years — 5G connectivity.

Today, let’s dive into the details then identify one of key companies which could benefit.

***It started on December 1 with the arrest of a key Chinese executive

On December 1, Meng Wanzhou, Huawei’s CFO and daughter of the company’s founder Ren Zhengfei, was arrested in Vancouver. At the time, the arrest was based on “unspecified charges.”

As the story unfolded, we learned that Meng was said to have broken U.S. domestic sanctions law. Two indictments unsealed on Monday identify 23 criminal charges. Prosecutors claim a pattern of Huawei deceit, misleading U.S. authorities and business partners.

Huawei denies all of this, and China’s state media describes Meng’s arrest as a “kidnapping.”

***Behind the direct charges against Huawei is a lurking fear — Chinese espionage

China’s National Intelligence Law states that Chinese “organizations and citizens shall, in accordance with the law, support, cooperate with, and collaborate in national intelligence work.”

This has led to fears that the Chinese government could order Huawei (and other Chinese companies) to build “backdoors” into their equipment that would enable government officials to access sensitive data on the Huawei network for the purposes of spying or sabotage. According to Bloomberg:

The Trump administration, convinced Huawei is a Trojan horse for Chinese intelligence, is determined to blunt its growing sales and influence.

So far, the U.S., U.K., Australia, New Zealand, Czech Republic, Germany, France, Canada and Japan have expressed concerns about using equipment from Huawei (and Chinese telecom gear maker ZTE) or they have already imposed a ban on using the equipment. This past Wednesday, we learned The European Union is considering proposals that would effectively mean a de-facto ban on Huawei equipment.


Why should you care about any of this? And what’s the impact on your wallet?

Well, it just so happens that Huawei is the world’s largest supplier of telecommunication equipment. That makes it a key player in the rollout of next-generation 5G networks that’s beginning to take place around the globe.

It’s this relationship to 5G that we’re watching.

***At this point, let’s briefly digress from Huawei to make sure we’re all on the same page about 5G and its significance

“5G” refers to internet connectivity and the speeds at which we can upload and download data.

Matt McCall is the editor of Investment Opportunities. In his newsletter, he helps readers understand and profit from the major trends that are reshaping our world. Here is what he wrote to his subscribers about 5G back in the fall:

The next-generation network will take speeds to levels that seem almost unimaginable.

How fast?

Well, 5G will in theory increase the level of speed to match that of human reflexes, so we’re talking the blink of an eye, perhaps literally.

The current 4G network clocks in at around 100 megabits per second, which is extremely fast compared to 3G. But once 5G rolls out, that number jumps to 10,000 megabits per second — or 100 times faster than the current speed!

The big breakthrough will be the ability to connect a lot more devices that share large amounts of data in real-time.

As Matt points out, 5G’s ability to connect more devices and share more data in real-time is critical — in fact, that’s the real story. This is because all the major technological innovations of tomorrow — self-driving cars, the Internet of Things, virtual reality, the cloud, robotics, smart cities, artificial intelligence — they’ll all require lightning fast, stable internet connectivity.

The Wall Street Journal recently described the online-demands from all of our innovations, which are pointing toward the need for 5G:

We’re on the cusp of an unprecedented explosion in the number of devices coming online-billions of smart-home sensors, industrial devices and artificially intelligent computers. The systems we have now simply weren’t built to handle the sheer volume.

In the next couple of years, big changes are coming to all the wireless connections near you.

You’re going to hear more than you ever wanted about wireless protocols in the next year or so, as every carrier, chip maker and gadget manufacturer tries to capture 5G supremacy.

***Simply put, 5G will be the foundation of all our future technologies — so the companies that lead the 5G revolution are likely going to make their investors significant wealth

Let’s return to Huawei.

As mentioned earlier, numerous governments around the world are considering banning use of Huawei’s equipment. There are good and bad aspects to this.

On the bad side, as mentioned earlier, Huawei is the world’s largest supplier of telecommunication equipment. It’s also a leading technology innovator. If its products and services are banned around the globe, it could slow down how quickly you and I are able to benefit from 5G and its related technologies.

On the good side, a broad-brush Huawei ban could mean unexpected profits for the other players in the space. For more on this, let’s look to the numbers …

In the first three quarters of 2018, Huawei dominated the global telecom-equipment market. It took in 28% of all revenues. Nokia came in second at 17%, with Ericsson at third with 13.4%. Pulling back more broadly, according to IHS Markit, Huawei accounted for 28% of the mobile infrastructure market last year. Ericsson and Nokia were at 27% and 23%, respectively.

With Huawei claiming so much market share, if multiple governments around the globe ban the use of its telecom equipment, that could create a significant space in the market for other 5G players to fill.

So far, Ericsson and Nokia have been tight-lipped about the potential tailwinds this could provide them. From The Wall Street Journal:

Mr. Ekholm (Ericsson’s CEO) said it would be speculative to say how security concerns concerning Chinese manufacturers could help Ericsson. “Where this is going to take us, we don’t know,” he said.

That said, an executive at one of Huawei’s smaller rivals was more open about the benefits, revealing that the charges have already helped business. “We probably won some contracts that we wouldn’t have otherwise,” he admitted.

***So, how might you play this? Matt McCall is letting us publish one of his best ideas

We usually reserve specific stock recommendations for subscribers of our analysts’ newsletters. But for today’s Digest, Matt McCall agreed to let me feature one of his key 5G recommendations — Ericsson.

From Matt’s October issue of Investment Opportunities:

ERIC is now one of the best-positioned companies to benefit from the transition to the 5G network.

(In September), Ericsson announced a $3.5 billion deal with T-Mobile, the third largest mobile company in the United States. As part of the deal, Ericsson will supply T-Mobile with the latest and greatest 5G radio hardware (and 3GPP, which are products based on 3G standards). It will help solidify Ericsson as the biggest supplier of mobile network gear in the United States.

Prior to the massive deal with T-Mobile, Ericsson had been busy signing other top mobile operators to deals. AT&T revealed earlier this month that it has chosen the Big Three of equipment companies to help with its 5G deployment plans. Ericsson, along with Nokia and Samsung, will be helping AT&T. This isn’t surprising given Ericsson’s past relationship with the mobile giant. Ericsson helped AT&T build out its LTE (4G) network and has been a long-time partner.

The deals for Ericsson are not isolated to the U.S. Large South Korean mobile operator SK Telecom has chosen the company along with its two peers for its rollout of 5G in the coming years.

If you’re interested in Ericsson, Matt suggests buying it under $9.25. At the time of this writing, it’s trading at $8.91.

Ericsson isn’t the only company Matt has identified which could see major gains as 5G rolls out. If you’re interested in getting more from Matt on this trend, as well as the other stocks he’s recommending, click here.

Coming full circle, if you haven’t been watching the drama around Huawei, we think it’s worth your time to pay it some attention. Its outcome could affect how quickly 5G rolls out, and it could have a significant impact on Ericsson and a handful of other key players in the coming quarters.

Have a good evening,

Jeff Remsburg

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