There are a handful of stocks that may end up as major beneficiaries of the ongoing U.S.-China trade conflict, a war that seems to have created only losers to date. Among potential winners include telecom giants Ciena Corp. (CIEN), Nokia Corp. (NOK), Ericsson ADR (ERIC) and Adtran (ADTN), which are likely to see their sales surge if the U.S. government decides to ban Chinese tech giant Huawei Technologies from doing business with American companies, per Barron’s.
Spending on global telecom is accelerating as wireless networks move to 5G, broadband moves to 10G, and fiber-optic networks are upgraded. Removing Huawei from a large portion of the market would provide a boost to Western companies, which make rival products that are often more expensive. Meanwhile, three companies that do big business with Huawei are likely to get creamed, placing NeoPhotonics (NPTN), Lumentum Holdings (LITE), and II-VI (IIVI) at risk. All three of Huawei’s suppliers have already seen their stock prices plummet.
Huawei is a privately-held company and is not listed on any public stock exchange.
4 Companies That Win If Huawei Loses
· Nokia (CIEN)
· Ericsson (ERIC)
· Adtran (ADTN)
· Ciena (CIEN)
On Monday, the U.S. Justice Department announced charges against the Huawei, including allegations that the Chinese company violated U.S. sanctions on Iran, and stole trade secrets from T-Mobile US (TMUS). The U.S. also formally requested for Huawei Chief Financial Officer Meng Wanzhou to be extradited from Canada.
Huawei’s Fiber-Optic Network Suppliers Suffer
MKM Partners believes it is now more probable than not that the Chinese equipment maker is entirely cut off from buying U.S. components. This spells bad news for Huawei’s suppliers in the optical-components market, which provide key parts for its fiber-optic network infrastructure. MKM managing director Michael Genovese estimates that Huawei accounts for roughly 15% of the industry's total revenues.
The DOJ’s announcement is particularly painful for companies like San Jose, Calif.-based NeoPhotonics, which generates more than 40% of revenues from Huawei. U.S. based suppliers Lumentum and II-VI both generate more than 15% of their total revenues from the Shenzhen-based tech titan.
Chinese makers of telecom equipment are reportedly pre-ordering extra inventory in anticipation of a purchasing ban, per Barron’s.
“According to our checks, Huawei, ZTE, and FiberHome are currently building optical-component inventory,” Genovese wrote in a report published Tuesday morning. “While near-term results for the industry are likely to be upbeat, investors are unlikely to give much credit unless and until Huawei is explicitly not banned by the U.S. as part of a trade agreement and/or DOJ settlement.”
Huawei Competitors Could See Revenues Jump
Given Huawei maintains a significant chunk of the global and U.S. market, its absence would free up market share for competitors such as Huntsville, AL-based Adtran, whose stock has gained nearly 5% this week. Others set to see a top line lift on the potential ban include Nokia and Ciena, which have seen their shares fall over 5% in five days, as well as Ericsson, whose stock is trading flat over the same period.
Genovese expects the next-generation of 5G technology spending over the coming year to help Scandinavian telecom-providers gain ground against Huawei.
“We expect Nokia and Ericsson are likely to gain share in South Korea and Japan at Huawei’s expense in 2019, and to gain share significant share in Europe in 2020 as 5G begins to sweep across the continent,” wrote the MKM Partners analyst.
Ultimately, cutting Huawei off from US suppliers could stall the firm’s progress in China, where it supplies equipment for 5G networks. Genovese expects China to fall behind South Korea and Japan in terms of building a nationwide 5G network in 2019. The ban could also delay European 5G targets by as much as two years, wrote Genovese.
The very risk of Huawei being banned from the U.S. market may be one factor pushing China toward a trade deal with Washington. Yet even Huawei isn't formally banned, the pressure on U.S., European and other companies to abandon or reduce Huawei as a supplier many still give its competitors a load of new business, boosting their profits and share prices.