What China and Huawei mean to Broadcom
Broadcom (AVGO), Qualcomm, and Huawei have a complex customer and competitor relationship. Broadcom supplies Huawei with networking products, like switches, that direct data traffic between connected computers. Qualcomm supplies modem and mobile processors to Huawei. Broadcom and Qualcomm earn 50% and 67% of their revenues from China. Huawei is one of Broadcom and Qualcomm’s key customers in China.
The US-China trade war reignited on May 10 when the US raised tariffs on $200 billion worth of Chinese imports to 25% from 10%. China retaliated with up to 25% tariffs on $60 billion worth of US imports. The situation got worse when the US targeted the communication sector. The US added Huawei to the entity list. The US doesn’t impose an outright ban on these companies. However, US firms have a hard time selling products to the companies on the list.
United States-China trade tensions
Lumentum, an optical and photonic products supplier, cut its June earnings guidance after the Huawei ban was announced. Broadcom is scheduled to release its second-quarter earnings on June 13 for the quarter ending on May 3.
Broadcom earns 76% of its revenues from Semiconductor Solutions, which reported a 12% YoY decline in its revenues in the first quarter due to demand weakness in the smartphone market. A Huawei ban will take away a large order from Broadcom. The ban will likely accelerate the revenue declines from the semiconductor segment. The tariffs will likely reduce the end-market demand more and impact the revenues.
If the Huawei ban continues, Broadcom might report weak guidance for the third quarter. The company might report its first YoY (year-over-year) revenue decline in more than two years.
Broadcom stock is oversold
Since the announcement of the Huawei ban on May 16, Broadcom stock has fallen more than 10%. Broadcom stock is oversold and trading 6% above its 200-day moving average of $256.84. The moving average takes the average of a stock’s prices over a certain period to understand which direction its movement is skewed. If Broadcom falls below its 200-moving average, the stock could hit a technical downturn.