Arguably most analysts are concerned about which publicly traded companies face the most risk over the coronavirus from China. However, in the case of telecommunications equipment provider Ericsson (NASDAQ:ERIC), it might benefit from the outbreak. That’s because Ericsson stock may jump higher from the underlying organization stealing market share from sector leader Huawei.
In June of last year, Huawei held 27.6% of share in the IT network vendors market. This tally was significantly higher than the second-biggest share of 18.8%, held by Cisco Systems (NASDAQ:CSCO). Ericsson ranked fourth at 7.9%, notably lower than rival Nokia (NYSE:NOK). But with Huawei exposed to substantial, perhaps overwhelming risk due to the coronavirus, it’s a cynical catalyst for Ericsson stock.
Although the possibility is compelling, which I’ll explain later, this speculative thesis is not without its own serious risks. For instance, previously assumed tailwinds for Ericsson stock as it related to Huawei never panned out. As our own Vince Martin explained, the U.S.-China trade war potentially opened doors for ERIC. The U.S. has pushed other countries to ban the telecom equipment provider’s products for security threats.
However, that warning has apparently fallen on deaf ears. In late January, the U.K. – a critical ally to the U.S. – refused to go along with the ban. Although Huawei won’t partake in Britain’s core 5G infrastructure, it will service the non-essential rollout. Further, Martin points out that Huawei and Nokia “scored a big win” with Telefonica Deutschland (OTCMKTS:TELDF).
Interestingly, while the U.K. faced political pressure from the U.S., it also felt China’s economic pressure. For the British, ticking off a longtime ally was worth ensuring a stable partnership with the world’s second-biggest economy.
Could the Coronavirus Save Ericsson Stock?
As the numbers demonstrate, a trade war wasn’t enough to dent Huawei. With China becoming a legitimate superpower, it doesn’t bow down to the U.S. like it used to. Indeed, it’s playing the American game against us.
But what about a humanitarian crisis? At the time of this writing, the number of coronavirus infections is 74,546 cases, according to the Washington Post. Based on the trajectory of this virus, we’ll soon see 100,000 cumulatively infected. Because scientists still don’t know much about the coronavirus, it’s too early to say that the worst is over.
Obviously, for Huawei, this is incredibly problematic as the vast majority of cases are centered in China. Further, investment analysts report that Huawei’s smartphone business has over 60% exposure to this domestic market. Thus, they are easily among the worst hit in terms of China-based smartphone sales.
To make up for this loss, Huawei must depend on its other viable arms. Therefore, you’d expect that they can’t aggressively price out the competition as they have previously.
Moreover, China is steadily losing its economic leverage to bully other countries. For example, when the British rebuffed the Trump administration’s warnings about Huawei, the coronavirus didn’t seem like an existential crisis. Now, the narrative is steadily shifting.
Many experts are warning that the impact to China’s economy is much worse than previously forecasted. As such, several analysts are warning that the markets are being too complacent about the epidemic. Further, China doesn’t have a stellar reputation for transparency. When these analysts say that the situation could be worse, this sentiment contextually carries more weight.
Again, it’s a cynical idea for Ericsson stock. However, if the underlying company wanted an opening against Huawei, it doesn’t get any better than this.
The Coronavirus Could Be Too Effective
On the flipside, the most realistic scenario for the outbreak to be a net benefit for Ericsson stock is if the disease mostly stays in China. However, that’s not what’s occurring. As the Post reported, South Korea reported its first coronavirus death. In response, the mayor of Daegu – the city where almost all of Korea’s coronavirus cases have originated – urged residents to stay indoors.
I don’t want to think about the movie Contagion. Admittedly, though, it’s in the back of my mind. Should a global pandemic occur, I think the speculative case for Ericsson stock makes far less sense.
That said, I’m not entirely opposed to taking a shot with money you can afford to lose. For one thing, the 5G landscape is still in the early stages, providing opportunities for all. With China being in a weaker position economically – and I’d say morally for their failure to address the outbreak quickly – Huawei by logical deduction is also weakened.
Plus, let’s face it: Ericsson rival Nokia isn’t exactly building up credibility points. With the important competitors taking hits, ERIC just might sneak in and expand its footprint.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.