As tobacco companies and other pariah industries could tell you, it’s tough to make money when doors keep shutting on you.
Huawei Technologies Ltd. and its investors are learning that quickly.
On Wednesday, the Chinese tech giant reported that first-quarter sales dropped 16.5% from a year ago to 152.2 billion yuan ($23.5 billion).
That’s what happens when the number of smartphones you’re able to sell in your home market is slashed in half to 14.9 million in the first quarter from 30.1 million in the same period last year.
And that’s what the company was willing to tell us.
It did not report anything on earnings (though it said profitability improved)… and was also mum on 5G telecommunications gear sales and other business lines.
Huawei was China’s first attempt at a worldwide tech brand and, not long ago, it owned among the largest global market shares in smartphones and telecom equipment. But that’s no longer true (or won’t be soon).
Of course, such terrible reports don’t occur in a vacuum.
We’re still buying smartphones, and telephone and internet companies are still buying the gear they need to ramp up for the 5G revolution. Those sales are going somewhere.
So today, let’s take a look at how Huawei became a pariah.
Plus, I’ll show you where billions of those 5G dollars are headed.
From Prince to Pariah
As recently as 2019, Huawei seemed like the leading horse in the race to deploy 5G technology worldwide.
But there’s a hitch: The U.S. government distrusts Huawei, and so do several other nations around the world.
The company has become a corporate pariah in the United States because of its alleged spying activities on behalf of the Chinese government. Federal authorities feared Huawei was functioning as a kind of Trojan horse for Chinese intelligence.
In May 2019, President Donald Trump put Huawei — and some other Chinese companies — on the so-called Entity List. That meant Huawei could no longer do business in the United States.
Then early last summer, President Donald Trump designated the leading manufacturer of 5G equipment as backed by the Chinese military. And on June 30, the U.S. Federal Communications Commission officially named Huawei as a national security threat.
Due to those sanctions, Huawei no longer has access to the U.S. technology it needs to make its processor chips. Moreover, it can’t even put apps from Google and other American companies on its phones.
The Biden administration has shown no signs of loosening these sanctions.
Even if Huawei can put together a decent phone after all that, it can’t sell them here, in the world’s biggest market.
Plus, the U.S., the United Kingdom, and other Western nations have banned gear from Huawei and other suspect Chinese vendors from their telecom networks. Some nations have even set deadlines for stripping out the equipment that’s already there.
The Shenzhen-based company once had its sights on becoming the largest tech company in the world, but Western nations have now almost entirely cut ties with the company.
Hence, Wednesday’s poor earnings report.
And so, Western nations and companies have all started looking for other non-Chinese 5G technology suppliers.
Two European tech companies that I’ve recommended in Fry’s Investment Report are emerging as clear winners.
The “Not Made in China” Go-Tos
In countries that have restricted or banned commerce with Huawei, these two have become the go-to replacement vendors.
Earlier this month, one reported first-quarter earnings that topped analyst estimates, and also stated that it was gaining market share in the worldwide 5G market.
In particular, the company showed that is expanding its global footprint at the expense of Huawei. It has capitalized on this opportunity and consolidated its position as the market leader in 5G with 136 commercial contracts and 85 live networks in 42 countries.
During the first quarter, this company generated double-digit revenue growth in three of the five geographic regions in which it operates.
Its CEO says his team is “very optimistic” about the second quarter. As he stated on the earnings conference call: “We believe the 5G cycle will be both longer and bigger due to entering a complete new application area with enterprise applications.”
Wall Street analysts seem to believe him, as consensus earnings estimates are moving steadily higher, both for this year and next.
Thanks to the company’s demonstrable recent successes, the stock is up 30% since we picked it up last September. But I expect this trade to deliver even greater gains over the coming months.
Then there’s the other 5G equipment supplier we’re following at Fry’s Investment Report. Its shares surged more than 10% on Thursday after the firm reported surprisingly good first-quarter earnings.
These solid numbers were driven by 5G, network infrastructure, and mobile network growth. Sales and net income both increased from the same period last year, beating estimates. Earnings per share beat estimates, too.
Meanwhile, operating income turned around from a loss in first-quarter 2020 to a $522 million gain.
The company’s fiscal year 2021 outlook looks strong, too, including estimated sales between $24.9 billion and $26.4 billion, as well as a comparable operating margin of 7% to 10%.
Indeed, assuming the 5G cycle will in fact “be both longer and bigger” than previous upgrade cycles, these companies are now on a long runway of potential profit growth, as are many other players in the 5G sector.
In our economic war against China, both of these companies are major players in the retooling effort to shore up our tech infrastructure.
And as I’ve shown you here, they’re also major profit opportunities for members of Fry’s Investment Report.
To learn more about them — and to get in line for my next 5G-related recommendation — go here.
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On the date of publication, Eric Fry did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.