Amid the continuing trade tussle with China, Telefonica, S.A. (TEF - Free Report) is reportedly considering to augment its 5G network infrastructure in Spain by reinforcing its long-term partnership with Huawei.
In addition, the Spanish telecom behemoth will adopt a multi-vendor strategy by collaborating with another unnamed service provider in order to establish its 5G infrastructure in 2020. Nokia Corporation (NOK - Free Report) and Ericsson (ERIC - Free Report) , are likely contenders to join the fray and team up with Telefonica in Spain.
Majority of the mobile operators are now opting for a multi-vendor strategy as it is believed to strengthen the adaptability of the network infrastructure. In a single-vendor concept, the operators depend on a single network provider, often leading to network disruption. Moreover, if a vendor faces any sudden supply chain issue that is beyond its control, it could be easily replaced by the more reliable vendor to prevent any service outage.
Embargo on Huawei
The Trump administration has long suspected Huawei to be an extension of China’s government due to the close ties of its founder with the military. Incriminating documents disclosing the supposed ties of Huawei with two obscure companies, using which its CFO allegedly deceived international banks into clearing transactions (worth millions of dollars) with Iran despite U.S. economic sanctions, validated its suspicions.
Per the media reports, excluding Huawei is considered to be a strategic move of the United States to dominate 5G technology worldwide. However, Portugal and Spain have opposed to impose any trade restrictions on Huawei and decided to take actions based only on a case-by-case basis.
Existing Business Scenario
Markedly, investment in fiber network is the key driver for Telefonica’s growth. With its operations across 17 countries, it has 344 million accesses with a robust footprint in Spain, Europe and Latin America. With major disruption in the cards in eight Latin American markets, including Mexico, Colombia and Argentina, the company aims to “reinvent” itself amid a challenging macroeconomic environment. The company has also secured interests from various industries for its communication infrastructure properties, which generates a stable cash flow. The Spanish telecom company is successfully capitalizing on the opportunities in the digital world through several growth strategies to enhance its long-term prospects, while experiencing healthy traction in the smartphone market. It has significantly accelerated the deployment of ultrafast networks. Continued rollout of fiber and LTE are set to drive considerable growth of the company.
Telefonica has a long-term earnings expectation of 9.2%. The stock has added 2.7% compared with the industry’s rise of 1.1% in the last three months.
Zacks Rank & A Key Pick
Telefonica currently has a Zacks Rank #3 (Hold).
A better-ranked stock in the industry is Vivendi SA (VIVHY - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Vivendi has long-term earnings growth expectation of 13.9%.
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