In the year of 5G, names like Ericsson (NASDAQ:ERIC) have been crushing it. Ericsson stock is up more than 32% year-to-date. But that’s just the start. Even as shares touch 52-week highs, mega trends in motion could propel the 5G supplier’s shares even higher.
How? Firstly, the “5G catalyst.” The global demand for 5G equipment continues to accelerate. Secondly, and more importantly, the geopolitical tailwinds.
The U.S. is clamping down on Chinese-based Huawei. That telecom equipment giant has captured significant market share in Western markets like Europe, but now the U.S. is compelling its allies to shun Huawei. And who’s set to win? Western-based suppliers like Ericsson.
Unlike Ericsson’s other Western rival, Nokia (NYSE:NOK), this company already operates from a position of strength. Far ahead of its Finnish-based rival in 5G execution, the latest geopolitical moves could help them make a big leap forward regarding market share.
But, that’s not all! If the U.S. takes its support of western telecom equipment names further, they could financially back a company like Ericsson. Granted, this is a long-shot factor. Even so, having Uncle Sam in its corner remains a major catalyst for shares.
In short, this stock’s recent run is far from over. Buy now, as it’ll remain a huge winner.
Ericsson Stock and Geopolitics
Topping Wall Street estimates last month, it’s safe to say Ericsson is crushing it right now. With quarterly earnings of 74 cents per share, well above consensus of 63 cents per share, the company continues to exceed expectations.
That’s no surprise. As 5G network sales drive growth, the company has been a clear winner. With 5G investment set to pick up in North America during the second half of 2020, expect this blockbuster success to continue.
Sure, this alone makes Ericsson stock a strong opportunity to consider. But, it’s the geopolitical tailwinds that may turn ERIC into a huge long-term winner.
As I discussed back in June, the U.S. federal government sees Huawei’s rising dominance as a national security threat. To counter it, Uncle Sam has taken an interest in 5G equipment makers.
Yet, there isn’t a U.S.-based 5G supplier large enough to take on Huawei. The federal government has turned its attention to the largest western-based names in the space, Ericsson and Nokia.
Sure, it’s debatable how far this support could go. Back in February, the idea of the U.S. taking an equity stake in either name was on the table, but with the novel coronavirus, this proposal has fallen to the back burner.
The U.S. government can still back Ericsson and Nokia without taking a direct equity stake. Whether that’s favorable financing or tax incentives, or pushing for a U.S.-based company like Cisco (NASDAQ:CSCO) to buy out either name outright.
Having the weight of Uncle Sam behind it remains a massive catalyst. Coupled with Ericsson’s strength versus Nokia, this remains one of the best 5G plays out there.
Is There Downside to U.S. Support?
There’s no denying the power of having the U.S. government in Ericsson’s corner. But, will it hurt the company’s opportunities in China? Sure, there’s talk that the Chinese government may retaliate as Europe shuns Huawei.
The odds of this happening aren’t as great as the headlines imply. Yes, China could put in place export controls on Ericsson’s Chinese manufacturing operations. Considering such an aggressive move could backfire, it’s likely not in the cards.
Also, U.S.-China tensions haven’t stopped Ericsson from making inroads in China’s 5G market. For example, consider the company’s recent contract wins with China’s largest mobile carriers.
Ericsson stock has much to gain from this geopolitical tailwind. But, won’t Nokia benefit as well?
Yes and no. With both default winners of the Huawei clampdown, it has a shot at gaining ground as well, yet Nokia dropped the ball many times when it comes to executing its 5G rollout. Ericsson seized the opportunity and is reaping the benefits. Expect this dynamic to continue.
Ericsson Stock Remains a Winner With Massive Runway
The adoption of 5G is one of the largest transformations going on right now. With a clear edge against rival Nokia and the U.S. paving the way for market share gains, it’s hard to see Ericsson’s recent success slowing down anytime soon.
Even as shares trade near 52-week highs, you can enter in Ericsson stock at a reasonable valuation. With massive runway thanks to geopolitical tailwinds, this remains one of the top 5G plays out there.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
