Swedish telecom company Ericsson (Ericsson Stock Quote, Chart, News NASDAQ:ERIC) has pulled back with the general market and tech dip in recent weeks, which might seem to put fans of the company in a buying opportunity.
Possibly, says portfolio manager John O’Connell of Davis Rea Investment Counsel, but Ericsson is up against stiff competition in the 5G space with the likes of Huawei.
Ericsson, which has networking equipment and telecommunications technology business worldwide, has been a key player in the rollout of next-generation 5G networks, and the company has benefited from the infrastructure upgrade even as businesses strive to make it through to the other side of the current pandemic and resultant economic slowdown.
But O’Connell, CEO of Davis Rea, who spoke on BNN Bloomberg on Wednesday, said Ericsson’s way forward might hit a serious roadblock in the form of Chinese competitor in the 5G space Huawei, which despite concerns over its connections to the Chinese government is still gaining contracts worldwide.
“We tend to stay away from hardware producers because it’s very hard to differentiate the product versus another company’s products, the exception really obviously being Apple because it’s such an integrated ecosystem,” O’Connell said.
“The major issue with Ericsson is maybe more of timing. Huawei is still very much a serious player. And while I think there's going to be a push to have Ericsson and Nokia be major players in 5G and while I definitely think there’s a huge equipment spend, Ericsson’s customers are also struggling with a great deal of price competition,” O’Connell said.
Ericsson’s strengths were on display in the company’s latest quarter where the company beat analysts’ forecasts on profit, coming in with revenue up one per cent year-over-year to 55.6 billion Swedish crowns and adjusted earnings climbing to 4.5 billion crowns from 3.9 billion crowns a year ago, handily beating the consensus forecast of 3.36 billion crowns.
Ericsson president and CEO Börje Ekholm said his company continues to perform strongly during the COVID-19 period but he added in his quarterly comments in July a warning to European Union leaders that the rollout of 5G in Europe needs to be considered a priority for the economic health of EU countries.
“As we prepare to exit the crisis caused by Covid-19, there is a need to restart economies and make strategic, forward looking investments which we suggest must include the future digital infrastructure,” Ekholm wrote. “We see many regions around the world increasing investments in this space and as a European company we are concerned that Europe will fall behind.”
“As critical national infrastructure, 5G will be a key determinant for long-term competitiveness of the general economy, and act as a stimulant to accelerate economic growth, attract future investments and speed up technology innovation. I believe Europe must prioritize actions to incentivize investments in the digital infrastructure, to include lowering the cost and speeding up the availability of spectrum,” Ekholm wrote.
The role that Huawei may play in that critical infrastructure is still hotly debated in Europe as well as in Canada, with the United Kingdom now having imposed a ban on Huawei while German chancellor Angela Merkel recently made comments that seemed to leave the door open for Huawei’s participation in Germany’s 5G setup.
O’Connell said ultimately Huawei’s role in the global 5G rollout will make it tougher on Ericsson.
“You’re dealing with an area where their customers aren’t all that strong and they’re having to make these investments but they don’t want to, and Huawei is still very much in the forefront,” O’Connell said. “I believe they’re still about 40 per cent of all 5G installs, so while they’re under attack they are by no means dead yet.”