The case for investing in Swedish 5G leader, Ericsson … Matt McCall, Neil George, and Eric Fry all agree … the catalyst that could drive gains starting now
Here in the Digest, we often stress the need to align your portfolio with technology.
Today, let’s talk specifics.
In this Digest, I’m going to put a 5G leader under your crosshairs for consideration. But this one is unique …
Stepping back a moment, all of our InvestorPlace analysts have recommended tech stocks in their respective portfolios. Of course, these recommendations reflect the differing market-approaches of each analyst.
For example, there’s long-term-trend tech … shorter-term earnings-based tech … hyper-growth tech … picks ‘n shovels tech … income-investment tech …
With so many potential approaches, the specific tech recommendations we find in their portfolios rarely overlap.
That’s why the stock we’ll discuss today is different — it’s been highlighted independently by three of our analysts.
In surveying the vast sea of potential tech investments, Matt McCall, Neil George, and Eric Fry have all honed in on one specific play…
Swedish 5G leader, Ericsson.
In today’s Digest, let’s find out why.
***The 5G trend poised for massive growth
To make sure we’re all on the same page, let me begin with some basic 5G context for any newer Digest readers.
“5G” is the common name for the fifth generation of technology standards for our cellular networks. Right now, your smartphone is probably connected to a 4G network, also known as LTE.
The next jump higher, which has just barely begun, is the leap to 5G.
To understand the significance of this advancement, I’m going to turn to our trend and tech specialist, Matt McCall.
From Matt’s Investment Opportunities issue:
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. So, if you think we live in a connected world already, you haven’t seen anything yet.
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 — will require lightning fast, stable internet connectivity.
Now, given how big 5G will be, what sort of dollar figures are attached?
After all, if we’re going to be investors in 5G, we want to have an idea of how well our money will be treated in this corner of the market.
For that answer, let’s turn to Eric Fry, our expert macro investor. From Eric’s recent Smart Money update:
The analysts at Markets and Markets valued the 5G infrastructure market at $784 million in 2019, and they forecast it to soar at a compound annual growth rate (CAGR) of 67.1% … to reach $47.78 billion by 2027 …
So, we have 5G powering countless innovations this decade. And we have a massive amount of wealth attached to the broad 5G complex.
Good so far.
But why Ericsson?
***Global politics puts Ericsson in the sweet spot
On December 1, 2019, 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 you likely know by now, Huawei is the world’s largest supplier of telecommunication equipment. That makes it a key player in the rollout of next-generation 5G networks.
Meng was said to have broken U.S. domestic sanctions law. Prosecutors claimed a pattern of Huawei deceit, misleading U.S. authorities and business partners.
As the drama played out, the key emerging issue ended up being that the U.S. feared Huawei was using its equipment to spy on foreign governments, all on behalf of Beijing. From Bloomberg:
“The Trump administration, convinced Huawei is a Trojan horse for Chinese intelligence, is determined to blunt its growing sales and influence.”
Now, let’s jump to where we are today with the drama, with the help of Eric’s recent update:
The Federal Communications Commission just designated Chinese technology companies Huawei Technologies Co. and ZTE Corp. as national security threats.
The action means many small rural carriers in the United States will no longer be able to tap federal subsidies to buy or maintain equipment produced by Huawei or ZTE.
This is happening just as those carriers are buying a lot of telecommunications equipment in order to ramp up for the 5G rollout …
That means we’re looking at a huge wave of capital moving away from China, ZTE, and Huawei … and toward their Western competitors.
***So, who are the two biggest western competitors?
Finnish telecom, Nokia, and — you guessed it — Ericsson.
While Nokia is likely to benefit from Huawei’s recent FCC designation too, Ericsson has a unique advantage.
For those specifics, let’s turn to Neil George, our expert income investor.
From Neil’s most recent Neil’s Journal update, combined with his most recent Profitable Investing issue:
(Patents for equipment) are at the core of 5G transmission …
… Ericsson … is far ahead of its highly challenged Nordic neighbor Nokia (NOK), US-based Qualcomm (QCOM) and others. The stock is a diamond in the rough.
… (it) has patents on transmission gear known as Massive Multiple-Input Multiple-Output (MIMO). 5G is different than the prior generations, including Long-Term Evolution (LTE) wireless. The signals need to be highly concentrated, and antennas need to be deployed in a lot more locations both inside and outside of buildings.
LTE uses broad signals that go far and wide but are limited in data speed and amounts. MIMO uses precisely targeted signals that allow for greater speed and capacity.
These patents aren’t the only thing to like about Ericsson. Matt has also highlighted its targeted customer demographic:
I especially like how Ericsson is focused on the industrial segment. The company has noted that it has been in talks with the “GEs and Honeywells of the world.”
This makes sense since the large multinational industrials have big money to spend and will need to move to 5G to keep up with their peers.
While on the topic of Ericsson’s customers, in Eric’s recent update, he pointed toward the company’s recent successes with deals and growth:
(Ericsson) 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 just so far this month.
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.
***The immediate catalyst that could push Ericsson higher
As any investor who has been in the markets a while will tell you, finding a great company doesn’t necessarily mean you’ve found a stock that’s about to make you money.
Many times, the stock of a well-run business will simply go sideways for years.
So, before investing, it’s often wise to find an answer for the question “why now?”. In other words, is there a catalyst that’s about to drive the stock higher, waking the market up to its value?
Eric suggests we have such a catalyst in Ericsson.
Back to his update:
… with more people working and shopping from home, mobile use is only heading higher.
As a result, we could be at an inflection point for this company.
Not only is the FCC cracking down on Chinese equipment gear, but in Congress’ $1.5 trillion infrastructure bill, which the House passed on 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, we could see a flood of money that will, in part, fund more 5G 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 and 5G networks are now a top priority.
So, let’s put all this together now, following the breadcrumb-trail toward Ericsson …
We have a massive trend in 5G … huge growth numbers attached to the 5G trend … a sector (telecom) that is critical to 5G’s expansion … the sector leader (Huawei) losing U.S. business which creates a massive vacuum for other players to step in … a competitive advantage for Ericsson given its patents … and a short-term catalyst for its stock price.
To top it all off, Ericsson is trading at a reasonable value.
Back to Neil on that note:
The shares are valued at only 1.4 times sales. Add in sales gains, and the share price should be much higher.
I’m raising ERIC’s buy-under price to $10.00, ideally for a taxable account. I expect I’ll be raising it again soon.
Bottom line — three analysts, one recommendation for Ericsson.
I’ll give Eric the final word:
… the global 5G dream is becoming a reality.
And (Ericsson) is riding in the sweet spot of the boom.
***As we go to press, Ericsson is soaring 14% based on a strong earnings-report this morning
That puts it above Neil’s buy-up-to price. Wait for a pullback before establishing a position. And if/when Neil raises his buy-up-to price, we’ll let you know here in the Digest.
Have a good evening,
Jeff Remsburg
