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Why the difference? Analysts like Ericsson’s strategy of trying to hold proprietary advantage on its wireless carrier equipment. Also, it makes more money than Nokia.
Ericsson, based in Sweden, measures earnings in Swedish Krona, now trading at almost 9 to the U.S. dollar. For the most recent quarter, that means it had $6.1 billion of revenue. That’s only slightly more than Finland’s Nokia, which had $6 billion. But Nokia earned just $94 million on its revenue, while Ericsson earned $270 million. Thus, Ericsson is worth $37 billion, Nokia just $23 billion.
Who’s right? Who’s wrong? Only the market can decide.
The Proprietary Way
While cell tower equipment is covered by standards, patents and copyrights have kept the market closely held between Ericsson and Nokia, which holds patents from Alcatel and Lucent.
The threat of China’s Huawei has forced the market to do a re-think, under pressure from the Trump Administration. Nokia has gone with the open standard, which could let Huawei and others in. Ericsson maintains a proprietary approach.
So far, to judge from press releases, Ericsson is winning. The Swedes just announced their 100th 5G contract and 56 of those networks are now live. Ericsson has been working directly with Qualcomm (NASDAQ:QCOM) on extending 5G into newly opened high frequencies. GlobalData calls Ericsson the 5G transport leader.
Ericsson insists that OpenRAN has security issues. It has already made its own equipment fully compliant with existing security and encryption standards. It has introduced an integrated packet core firewall to boost security further. This also increases its proprietary advantage.
In the U.S., Ericsson has a close partnership with Verizon (NYSE:VZ). AT&T (NYSE:T) has agreements with both it and Nokia, as well as Samsung (OTCMKTS:SSNLF). T-Mobile (NASDAQ:TMUS) is also using Ericsson in its 5G core network , along with Nokia and Cisco Systems (NASDAQ:CSCO).
What might settle the matter would be for Ericsson to buy Nokia.
Rumors of such a deal were floated in February. The administration has been pushing for more control over the 5G equipment market, even suggesting Cisco should buy one of the two Scandinavian companies.
While Cisco stock has been getting hammered lately, its market cap of $169 billion remains 4.5 times bigger than Ericsson, and more than 7.3 times bigger than Nokia. The best protection of European independence, then, might be for the two to merge. Their combined market cap of $60 billion, plus annual revenue of over $40 billion, would be too much for Cisco to swallow. Buying Nokia could also keep Ericsson out of the hands of one of the Cloud Czars, like Facebook, which might want to create open standards at a scale threatening Ericsson’s market leadership.
All this is leading to a new technology, called Cloud RAN. This idea should dominate the new market for managed services, which is growing rapidly. The idea is to run radio networks according to what are called “cloud principles.” Ericsson is already pushing its own proprietary (naturally) framework for this “journey.”
The Bottom Line on ERIC Stock
The growth of 5G in 2020 has been hampered by global power politics, the novel coronavirus pandemic and carriers’ own debt loads.
Political interference isn’t going to end in 2021. But there’s another thumb coming onto the scale, the Cloud Czars. While mobile companies like AT&T are worth six to seven times what Ericsson or Nokia are, even the smallest cloud companies, not just Facebook but China’s Alibaba Group Holding (NASDAQ:BABA), have the scale to create their own markets.
If the West goes with Ericsson and the East with Huawei, the only place where they can possibly meet is on some standard like OpenRAN. That’s why I suspect Ericsson’s leadership has a sell-by date. It’s also why I expect merger talks with Nokia to grow more serious.
On the date of publication, Dana Blankenhorn owned shares of QCOM and BABA.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.
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