Cisco Could Reap Benefits On Increased Huawei Security Fears, JP Morgan Says

Chinese equipment provider Huawei Technologies Co. has been struggling to overcome data privacy and security concerns casting a shadow around its telecommunications products, but Huawei's pain could be Cisco's gain, according to JP Morgan.

Increased scrutiny on a global level around the security of telecommunications products made by Huawei could serve as a headwind for Cisco, which manufactures routers, servers, and software, in international markets as other countries ease up on their use of Huawei, according to a note from JP Morgan senior analyst Samik Chatterjee on Friday.

Huawei had a tough 2018. Political pressure over alleged Chinese espionage efforts eroded reported deals that the company had in place with U.S.-based carrier giants, including AT&T and Verizon, to sell its phones. In December, Huawei's CFO Meng Wanzhou was accused of misleading financial institutions about the connection between Huawei and an unofficial subsidiary that allegedly did business in Iran as recently as four years ago, despite U.S. trade sanctions in place against the Middle Eastern country.

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The United States has moved to block use of Huawei equipment by domestic service providers for 5G network buildouts, but it's not the only country that's toying with the idea of blacklisting the Chinese firm. Countries such as Germany, France, Belgium, Japan, and the United Kingdom also have come forward with concerns about Huawei's presence within its telecom infrastructure. Australia blocked both Huawei and ZTE from supplying equipment to the country's 5G network, and New Zealand also banned the use of Huawei equipment for its own 5G network buildout.

Huawei doesn't have a large presence in the U.S., so the move to block domestic carriers from deploying its hardware won't open the door to much more additional opportunity in the U.S., Chatterjee said. Instead, Cisco should be placing its bets on the global opportunity.

"A greater opportunity lies in the international markets (EMEA and APAC ex-China) and we expect companies with established global presence (primarily Cisco and Ciena amongst others) to be well positioned to benefit from a pullback in business wins relative to 5G networks for Huawei," Chatterjee wrote.

CRN has reached out to Huawei for comment.

In the short-term, supplying networking gear to other countries as a result of the move away from Huawei could indeed be a good opportunity for Cisco, said Gary Berzack, CTO at eTribeca, a New York City-based Cisco partner.

"Cisco only has to grab a few extra percentage points to make a dramatic and positive change," he said.

At the same time, however, Cisco is in the process of trying to change the "battleground," Berzack said.

"Cisco is trying to get off heavy metal and into cloud, and Huawei isn't currently competing with them head-to-head on that side," he added.

Cisco in its latest quarter generated net revenues of $13.1 billion, up 8 percent year-over-year. Earnings increased to $0.75 per share, up 23 percent compared to the same year-ago quarter. At the same time, net income for the quarter hit $3.5 billion, an increase of 48 percent compared to the same period one year ago.

Cisco's stock climbed up 3.43 percent by early Friday afternoon eastern time.