Finding ways to tap into the Chinese internet market is no easy feat.
But courtesy of the nation's hefty investment in industrial assets -- many of which are in "desperate" need of digitalization -- General Electric (GE) now appears well poised to begin exporting its so-called Industrial Internet to China, William Blair analyst Nick Heymann said in a Friday phone interview.
And GE's CEO, Jeffrey Immelt, noted on Friday's second-quarter earnings call with analysts that GE's recent partnership with Chinese telecom giant Huawei, which was announced on Wednesday, is a signal that "momentum is taking off" for GE's digital platform. (GE stock is held in Jim Cramer's Action Alerts PLUS charitable trust.)
The Industrial Internet, around which GE has so far built a network of 54 partners, which is 20 more than reported in June, connects machine sensors to GE's proprietary Predix-based cloud software in order to maximize efficiency on machines from jet engines to wind farms and rail lines.
Immelt also said on the Friday call with analysts that the burgeoning platform now has 12,000 distributors, a 20% increase from June, setting the manufacturer on track to hit $7 billion in digital orders this year.
Prior to this Wednesday's deal with Huawei, GE signed a deal with Microsoft (MSFT) earlier this month to connect GE's Predix cloud with Microsoft's Azure cloud, creating the Predix OS Alliance with Microsoft, which will send data through Microsoft applications such as Office 360.
GE first launched Predix last August, and has since inked partnerships with companies such as Action Alerts PLUS portfolio holding Cisco Systems (CSCO) , as well as with Intel (INTC) and wireless companies Verizon (VZ) , AT&T (T) , Vodafone (VOD) and Sprint's (S) parent, Softbank.
"Huawei in China is another great relationship that'll help us extend on a global basis big wins," Immelt said on the investor call, noting "what you're seeing is momentum taking off," which will "accelerate throughout the year."
And by William Blair estimates, GE is on pace to pull in about $15 billion in data-analytics sales by 2020, with Heymann noting the deal with China is a promising sign of a "offense-defensive" play, given the deal grants GE exclusivity rights to work with major Chinese telecoms, creating barriers to entry for rivals such as Siemens (SIEGY) and Honeywell (HON) .
GE shares were down about 2% in midday trading Friday, despite topping analyst earnings forecasts, as earnings per share of $0.51 for the second quarter clocked in 12% higher than consensus estimates. Meanwhile, GE reiterated its 2016 forecast for operating EPS of $1.45 to $1.55.
The primary driver for the share decline was a reduction in industrial orders, which dropped 16% year over year, and were reported down 2% over the period after accounting for foreign exchange and acquisitions.
Action Alerts PLUS co-manager Jack Mohr said in a Friday note that AAP viewed the "quarter as more of a placeholder than tangible catalyst" and that "it will take time for traditional multi-industrial investors to appreciate the power of the company's transformation."