US-China trade war clouds second-half outlook
June is the month that most chipmakers ramp up production to prepare for holiday season sales. The chip stocks grew to their new highs in the first four months of 2019 after bottoming out on December 24, 2018. The VanEck Vectors Semiconductor ETF (SMH) rose 32.2% after falling 18.2% in the fourth quarter of 2018. Stocks like NVIDIA, Micron, Texas Instruments, and Applied Materials rose 28%, 33%, 25%, and 32% in the first four months of 2019 over anticipation of strong growth in the second half.
However, the trade war intensified in May with 25% tariffs on $200 billion in Chinese imports and a trade ban on Huawei, one of the biggest customers of US semiconductor companies. The new developments in the trade war clouded the chip industry’s growth in the second half, sending the chip stocks back to their December lows.
Semiconductor stocks hit hardest
The SMH rose 13.3% YTD. Stocks like Intel fell 5.8% YTD, while Micron, Qorvo (QRVO), and Skyworks rose just 4.9%, 2.2%, and 2.3% YTD. Broadcom (AVGO), Skyworks, and Qorvo stalled shipments to Huawei. Qorvo lowered its revenue guidance for the calendar second quarter by $50 million to reflect the impact of the Huawei ban.
The world’s largest communications chip supplier Broadcom is also expected to report weaker guidance when it releases its fiscal 2019 second-quarter earnings on June 13. The Huawei ban will slow 5G (fifth generation) deployment and reduce smartphone demand worldwide. As Broadcom earns more than 60% of its revenue from wired and wireless markets, a slowdown in the communications market will impact its revenue, and the company might report its first YoY decline in more than two years.