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Goldman Sachs Warns against Six Semi Stocks due to China Exposure

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Nov. 20 2020, Updated 3:31 p.m. ET

Semiconductor sector hit by weak demand in China

The second half of January 2019 has been turbulent for tech sector companies, semiconductors in particular, because of their high exposure to China (FXI). Back in April 2018, when the United States started levying tariffs on Chinese imports, the tech sector, especially Apple (AAPL), was among the top lobbyists against the tariffs. Many chip companies that depend on China for production shifted their supply chain to avoid the impact of tariffs. However, chip companies that depend on China for revenue could not protect themselves from the slowing economic demand, which was an after effect of the US-China trade war.

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According to CNBC, Goldman Sachs’s chief US equity strategist, David Kostin, stated that China’s 2018 economic growth was the slowest in 28 years as domestic demand weakened and exports slowed due to the onset of the tariff war. The weak Chinese demand significantly impacted companies that depend largely on the nation for its revenue.

Semiconductor earnings

Apple was the first to report the impact of weak Chinese demand in early January when it lowered its December 2018 quarter revenue by 7.7% from $91 billion to $84 billion. It attributed this decline in revenue guidance to weak demand from China. Apple’s guidance followed weak earnings and guidance by TSMC (TSM), Texas Instruments (TXN), and Intel (INTC), which all cited weakness in China for their revenue misses.

Goldman Sachs warns against tech companies with exposure to China

In the light of the recent earnings, Goldman Sachs, in a client note dated January 25, warned against seven companies that earn over 50% of their revenue from China. Six of the seven companies listed by Goldman Sachs were chip companies, namely, Broadcom (AVGO), Qorvo (QRVO), Skyworks (SWKS), Micron Technology (MU), Qualcomm (QCOM), and NVIDIA (NVDA).

Two days after Goldman Sachs’s warning, NVIDIA cut its profit guidance for the December 2018 quarter in half, citing weak demand from China as one of the causes. Apple will release its fiscal 2019 first-quarter earnings on January 29. We could see dips in the stocks of Apple’s major suppliers Broadcom, Qorvo, Skyworks, and Micron in tomorrow’s trading session.

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