Cisco Systems (CSCO) could be the beneficiary of the US blacklisting Huawei

NASDAQ: CSCO | Cisco Systems, Inc. News, Ratings, and Charts

CSCO – 5G is about the all-important future of connected things. Trump wants to make sure Huawei is not the running to dominate it.

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The Commerce Department’s announcement last week that it would require all U.S. companies doing business with Huawei and its affiliates to get a special license was a dramatic move designed to get China to surrender in the trade war. But chances are it won’t.

Huawei is a font of Chinese national pride. By most accounts, it currently makes the best telecommunications gear, with a clear lead in 5G development. Its systems, thanks to close integration with American semiconductor firms, are more advanced than those from Nokia (NOK) and Eriksson, and they are cheaper. Global telcos, ever eager for competitive advantages, have been lining up to add its switches and components to their networks.

And the stakes are high. Very often investors assume 5G wireless is about smartphones and download speeds between 10x and 1000x faster than 4G. That is short-sighted.

5G is about the future of connected things. Higher capacity networks with lower latency, the time it takes between initiating an action and it happening, will open up all sorts of new technologies. Connected and self-driving cars, remote robotic surgery, smart cites and factories are only the beginning of what is possible.

The company that wins the 5G race is going to reap untold riches. The Trump administration wants to make sure Huawei is not the running.

The directive from the Commerce Department, effectively banning the sale of semiconductors from U.S. firms, kneecaps Huawei in the worst possible way. There is no easy way for the company to build 5G products without that intellectual property.

Huawei depends on Qualcomm (QCOM) to make its smartphones. And its building out of 5G infrastructure will be impossible without the field gate programmable array IP being developed by Xilinx (XLNX) and Intel (INTC) .

FGPA chips are ideal for 5G because they allow the integrated circuit to be programmed after they are manufactured. Software-defined hardware is key to building flexible base stations and towers.

The Commerce Department claims the ban is a matter of national security. It points to longstanding concerns Huawei is merely a front for the Chinese government. Making the company ground zero for 5G is tantamount to building in a spy network. And there is some precedent for concern.

The Chinese government pledged in 2006 to build the African Union headquarters in Addis Ababa, Ethiopia. The $200 million project, completed in 2012, featured a state-of-the-art computer and networking system supplied by Huawei.

But Le Monde Afrique reported in 2018, that for two hours every night, African Union servers began transferring data back to Shanghai, 5,000 miles away. The breach was discovered by chance, according to a BBC story, when a scientist working late one evening discovered unusual server activity.

Huawei claimed no wrongdoing. However, the firm has close ties to the Chinese state government. Ren Zhengfei, its 74-year-old founder, began his career as a military technologist in the People Liberation Army.

Ren has become a symbol of Chinese entrepreneurial spirit. He started Huawei in 1987 with an investment of only $5,000. The company began modestly. As a reseller of telecommunication switches. Early employees worked, ate and lived in a small Hong Kong office. Today, the Shenzhen firm is the largest telecommunication firm in the world, with $108.5 billion in sales.

According to the corporate website, the firm has 180,000 employees in 170 countries and has built 1,500 telco networks, connecting one-third of the world’s population.

Now Washington wants to make it the first victim of the Sino-American trade war.

This is an important escalation. Attempts to kill Huawei will not sit well with Chinese political leaders. They have made it a vital part of longer-term plans to move the country from a supplier of inexpensive electronics to a technology leader in artificial intelligence, robotics, self-driving cars and aerospace.

In the technology space, there is plenty of gloom. Huawei is a major customer for U.S. technology companies. Quartz reported in 2016 that China imported $160 billion worth of semiconductors, making the tiny bits of silicon even more valuable to its economy than oil.

The White House may be on the right track but investors have to realize it is playing with fire.

One company that seems to have anticipated the trade war escalation is Cisco Systems (CSCO) . It’s also a logical beneficiary of a weaker Huawei.

Executives told reporters they have mitigated the effects of the move to 25% tariffs on many Chinese goods by moving part of its supply chain to other countries.

The global maker of telco equipment has also been transitioning to network services like security. The company had fiscal 2018 sales of $49.3 billion, a 2.7% increase year over year.

Shares trade at 16.5x forward earnings, for a market capitalization of $251 billion. Long term investors should consider buying a pullback to the low $50s area.

 


Cisco Systems Inc. shares were trading at $56.56 per share on Tuesday afternoon, up $0.55 (+0.98%). Year-to-date, Cisco Systems, Inc. (CSCO - Get Rating) has gained 32.38%, versus a 15.21% rise in the benchmark S&P 500 index during the same period.

Cisco Systems, Inc. (CSCO - Get Rating) currently has a StockNews.com POWR Rating of A (Strong Buy), and is ranked #1 of 53 stocks in the Technology – Communication/Networking category.

 


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