5G, or fifth-generation wireless, is going to make a lot of investors a lot of money. So far, however, it hasn’t done all that much for Ericsson (NASDAQ:ERIC). ERIC stock has rallied from March lows, but remains negative over the past year and trades well below 2015 highs.
I believe that will change at some point. Increasingly, the U.S. federal government is taking an interest in 5G equipment manufacturers. Despite its Swedish domicile, Ericsson could benefit given the lack of a real U.S. rival.
But even if the government tailwind doesn’t materialize, the long-term opportunity in 5G suggests the potential for significant upside. Ericsson stock remains significantly discounted relative to its earnings potential. Competitors are hampered. And the coronavirus pandemic could accelerate 5G adoption worldwide.
Put simply, Ericsson stock should be a winner. The question is how it happens.
The Growth of Huawei
Back in February, Attorney General William Barr floated the idea that the federal government should take a stake in either Ericsson or Finland’s Nokia (NYSE:NOK).
The logic was simple. The United States needs to, as Barr put it, “blunt” the growth of China’s Huawei. Officials in President Donald Trump’s administration remain concerned that Huawei equipment will allow China to eavesdrop on conversations or intercept data given the company’s alleged ties to Chinese intelligence agencies.
The federal government could support the growth of a U.S.-based alternative. But there really isn’t even the framework of such a company at the moment. Even marshaling the government’s resources, such an effort would take years. And with countries around the world, and particularly in the West, rolling out 5G now, Barr and others believe building a new 5G equipment supplier would take far too long.
Huawei already has been designated as a national security threat. But some high-ranking members of the government clearly want to go further.
Will the U.S. Back Ericsson?
Barr’s comments made a stir at the time — but attention faded as the coronavirus captured the country’s consciousness. But the Wall Street Journal reported last week that backing for Ericsson and/or Nokia remains under consideration.
According to the paper, one of the ideas considered is for government officials to push a company like Cisco Systems (NASDAQ:CSCO), which has its own 5G business, to acquire either of the European giants. A cash-rich tech giant like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) or even Facebook (NASDAQ:FB), which just took a stake in an Indian mobile operator, could make sense as well.
If that doesn’t work, tax incentives or other sources of financing also are on the table, per the Journal.
Obviously, a takeover would be good news for Ericsson stock. So, too, would be preferential treatment and/or access to low-cost financing.
To be sure, such a move isn’t guaranteed. It’s possible nothing gets done before the looming U.S. presidential election. Nokia could be the winner instead. Still, there’s a potential catalyst out there for Ericsson stock — and there’s a bull case even if the company has to go it alone.
The Case for ERIC Stock
After all, 5G is going to be a potentially transformative technology. As I’ve written before, the speed and reliability of 5G data can literally change the world. It’s akin to the buildout of America’s railroads.
And among large-cap stocks, there simply aren’t a lot of pure plays out there. Qualcomm (NASDAQ:QCOM) is one potential winner. But Ericsson stock is cheaper, and offers a more direct play on 5G infrastructure.
Meanwhile, I’d certainly prefer ERIC stock to that of Nokia. Ericsson continues to build its market share lead. Nokia’s execution has been subpar for years.
So what we have with Ericsson is a company that’s executing well ahead of a significant demand tailwind. In this market, stocks like that are dearly valued. ERIC, however, is not. Shares trade at just 20x forward earnings.
Add to that higher earnings and there’s a path for ERIC to show market-beating returns in the next couple of years.
And that’s without any help from the U.S. government. If Ericsson on its own can drive big-time upside, imagine what it can do with the backing of Uncle Sam.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
