In order to achieve full autonomy in driverless cars we will need to see much more then just advanced tech in-vehicle, we will also need a significant step up in infrastructure in the cities and spaces around the vehicles. This week we talk about a second stock that is well positioned to benefit from the rollout of 5G and the need for connectivity in infrastructure to support the emerging autonomous driving sector.
This is another stock in our Global Mobility portfolio positioned in the connectivity theme that is well positioned to benefit from the rollout of 5G. Based in Sweden, Ericsson is one of the largest telecommunication services providers in the world. They provide wireless telecommunication solutions across the globe, including communication infrastructure and software solutions to the telecom sector.
Q1 2021 Results
Benefits of 5G for Autonomous Driving
A key pillar we focus on in our Global Mobility fund, alongside electrification and sharing, is autonomous vehicles. Google subsidiary Waymo, who are developing their autonomous vehicle technology, has now achieved level 4 autonomy. This means vehicles can drive and operate without a driver but can’t go just anywhere and can’t operate under certain weather conditions. Waymo has been operating autonomous vehicles in Phoenix and it's only a matter of time before they become utilised at scale. The current 4G network is not fast enough to properly support autonomous vehicles and enable them to make human- like decisions. Autonomous cars use a multitude of sensors in order to navigate the streets, these sensors generate large amounts of data and, once autonomous vehicles get rolled out at scale, 5G will be integral to handling that amount of data at speed. Whilst higher data speeds are necessary in order for autonomous vehicles to work at scale, all roadside infrastructure will need to be connected. This involves traffic lights, sensors, cameras, road maintenance all communicating with each other. This connectivity will require significant investment in IoT (Internet of Things) and 5G. Mobile technology expansion will boost the flexibility of autonomous mobility through fast data communication between cars and other road infrastructure, such as traffic lights, sensors and other software that account for traffic and road maintenance. This will enable cars to safely travel at higher speeds, preemptively reduce their speed when necessary as well as aid in the efficient flow of traffic, preventing traffic jams. TAMIM’s Global Mobility fund is looking to capitalise on this growing ecosystem of companies that will be built around serving the electric and autonomous vehicle industry, companies like Crown Castle and Ericsson will play a vital role in ensuring that there is sufficient infrastructure and network capability for autonomous vehicles to operate efficiently.
With 34% of Ericsson sales coming from the US market, Ericsson has invested significantly in strengthening their portfolio offerings to benefit from 5G. Ericsson currently has nine live 5G networks across North America and, as more infrastructure is developed by our friends over at Crown Castle, Ericsson’s 5G network will expand significantly. They have 159 commercial 5G agreements/contracts with unique operators. Most recently, Ericsson won a pair of contracts from Vodafone to supply cloud native 5G core technology for Vodafone’s networks in the UK and Germany. Ericsson has been spending over $1bn USD every quarter on research and development, they continue to develop their IoT to strengthen their connectivity offering (essential to benefit from autonomous vehicles) and the connectivity demands that come with it.
The pandemic has only increased digitisation and data use which will further boost the demand for Ericsson’s services and, with key countries also banning Chinese operator Huawei, Ericsson has had their highest EBITDA margins since 2006. Its recent acquisition of Cradlepoint also expands the company’s presence in the enterprise 5G market.
In November last year Ericsson announced its acquisition of Cradlepoint for $1.1bn at a EBITDA margin of 61%. Cradlepoint provides cloud-delivered wireless edge solutions for branch, mobile, and IoT networks. They have over 20,000 customers, 1,500 channel partners, and over a million SaaS subscriptions. Cradlepoint is very accretive to Ericsson’s 5G growth strategy and will be a key cog in their ability to compete with Cisco. Cradlepoint has focused on unlocking the power of 5G and connectivity for businesses and customers through its robust channel ecosystem. Ericsson, through their acquisition of Cradlepoint, now has an opportunity to deliver wireless solutions that are more intelligent and more integrated to the carrier 5G service.
Ericsson is well positioned in the global race to roll out 5G infrastructure and are beginning to gain a bigger foothold of the global telecom market. The increased requirements and data demands of 5G are creating a mega thematic that Ericsson is looking to capitalise on. Ericsson already has plenty of 5G contracts with service providers in place and are investing heavily in their technologies for future growth. They are also looking for accretive acquisitions, like they have done with Cradlepoint who have boosted Ericssons product offering. Like CCI, Ericsson also stands to benefit from the emerging autonomous vehicle industry as a result of the increased need for 5G and connectivity through IoT. A catalyst that has emerged for Ericsson is the geopolitical issues surrounding Chinese telecom company Huawei, a Trump administration issue that Biden has retained. Key markets such as the US, Japan and the UK have outright banned their services with many more to follow, this opens the field right up for Ericsson to capitalise.
At TAMIM we are committed to educating investors on how best to manage their retirement futures.
Sign up to receive our weekly newsletter:
TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.