US markets plunged on Friday after China and the US once again escalated the trade war. Semiconductor companies will be among the worst hit by the tariffs, as they have high exposure in China.
Trade war escalation
The US (SPY) stock markets plunged on August 23 after China escalated the trade war with new tariffs on US goods. Before the market opened on August 23, China’s Ministry of Finance announced that it would impose new tariffs on US goods. The new tariffs would be in the range of 5%–10% on $75 billion worth of imported US goods. China would impose tariffs in two rounds in September and December. China also reinstated a 25% tariff on US automobiles and auto parts starting on December 15.
While the Dow Jones Industrial Average tanked more than 600 points, or 2.37%, the S&P 500 and Nasdaq Composite slid 2.59% and 3.00%, respectively. The US Treasury yields also fell to new lows of 1.535% on August 23 as investors ran for safe-haven stocks. The ten-year and two-year Treasury yield spreads also inverted many times during August 23’s trading session, signaling a recession trend.
Trump’s retaliation to China’s tariffs
After China’s tariffs, President Donald Trump retaliated via a series of tweets. Trump ordered US companies not to trade with Beijing and to start looking for an alternative to China.
Late on August 23, Trump announced that he would raise existing tariffs on $250 billion worth of Chinese goods to 30% from 25% starting in October. Trump also decided to raise the tariffs on an additional $300 billion worth of Chinese goods to 15% starting in September. Earlier, Trump had planned an additional 10% tariff on $300 billion but postponed it until December 15. On August 25, Trump even said that he could declare a national emergency amid the escalating trade war. However, he has no plans to do so now.
Meanwhile, China’s Ministry of Commerce has urged Trump to reverse the new tariff hikes. US Treasury Secretary Mnuchin pointed out China’s unfair trade practices, which escalated the trade war. Nevertheless, Mnuchin said on August 25, according to a CNBC report, “If China would agree to a fair and balanced relationship, we would sign that deal in a second.”
Stocks that were severely affected due to China’s tariffs
China’s new tariffs will primarily make electronics, including mobile phones and semiconductors, expensive. Machinery, aircraft, medical instruments, vehicles, oilseeds, and plastics, among other products, will also become the target of China’s tariffs. As a result of the announcement, iPhone maker Apple (AAPL) stock fell 4.6% on August 23. Apple’s suppliers, including Skyworks Solutions and Qorvo, also felt the pain and fell around 4.4% and 4.3%, respectively. Machinery stock Caterpillar tumbled 3.3% on August 23.
Semiconductor players’ high exposure in China
Semiconductor companies are highly sensitive to the trade war due to their high exposure in China. According to Morgan Stanley strategists in a CNBC report on June 19, 2018, semiconductor and semiconductor equipment companies generate more than 50% of their revenues from China.
Semiconductor stocks NVIDIA (NVDA) and Broadcom fell 5.3% and 5.4%, respectively, on August 23 on China’s new tariffs. Intel (INTC) fell 3.9%, while Micron (MU) and Qualcomm (QCOM) fell 4.1% and 4.7%, respectively, on the day. Advanced Micro Devices (AMD) fell the most in the industry with a decline of more than 7%. The VanEck Vectors Semiconductor ETF (SMH) also slid 3.95% on August 23.
The tit-for-tat trade war has made investors jittery that the global economy will fall into a recession. On the recent dip, many investors might prefer to sell their stocks due to these fears. However, the steep sell-off can also be considered a buying opportunity. Let’s take a look at those chip stocks that have solid fundamentals and upside potential. Investors may want to pick up these long-term stocks now.
NVIDIA stock has overcome its headwinds and is picking up the pace on the back of expected strong chip demand later in 2019. Despite recessionary fears, NVIDIA has gained 21.9% YTD (year-to-date) as of August 23. The company also recently posted impressive fiscal 2020 second-quarter earnings results, which could further drive its upside. Many institutional investors have also added stakes in NVDA lately. The company is making efforts to boost its gaming segment, along with other high-growth markets such as automotive, AI, data center, and professional visualization.
Looking at this trend, analysts expect sales to show improvement from the third quarter of fiscal 2020. Analysts have predicted sales growth of 38.9% in the third quarter. NVIDIA’s fiscal 2021 sales growth could reach around 19.7%.
While 26 analysts give NVDA a “buy” rating, 12 give it a “hold.” Only two analysts give NVDA a “sell” rating.
Among semiconductor stocks, AMD has generated tremendous returns so far this year. The stock has gained over 60% YTD compared to SMH, which has returned about 25.7% YTD. Though AMD posted lowered revenue guidance for the full year during its second-quarter results, the stock has been on a growth trajectory. AMD has reached hew heights since it launched its EPYC Rome server processor earlier this month. Its new 7 nm chips are expected to grab Intel’s share in the CPU (central processing unit) market. AMD also has the upper hand on rival NVIDIA in the GPU (graphics processing unit) market.
Analysts expect the company’s 2019 sales to grow at a sluggish rate. Its sales are expected to grow 4.56% YoY compared to 2018’s rate of 21.5%. Meanwhile, analysts expect its sales growth to improve 24.2% YoY in 2020.
While 14 analysts give AMD a “buy,” 22 give it a “hold.” Only two analysts call AMD stock a “sell.”
Micron has been grappling with lower memory prices over the past year. An oversupply of chips—driven by a slowdown in demand for mobile and other electronic devices—resulted in a decline in DRAM (dynamic random-access memory) and NAND (negative-AND) prices.
Despite these headwinds, Micron stock has gained 35.4% YTD. Further, Micron stock is expected to see a turnaround, as the company expects the DRAM market to improve and the NAND market to stabilize in the second half of 2019. The company’s investments in AI, autonomous technology, 5G wireless, and the Internet of Things are expected to drive the demand for its memory chips. Meanwhile, the company expects a significant improvement in DRAM and NAND pricing after 2020.
For fiscal 2019 (which ends in August), analysts expect Micron to see a YoY sales decline of 24.04% compared to its fiscal 2018 growth rate of 49.55%. Meanwhile, analysts expect its sales to grow starting in the third quarter of fiscal 2020. Therefore, its overall rate of sales decline should improve in fiscal 2020. Its sales are expected to fall 14.3% in the year.
Nineteen analysts call Micron stock a “buy,” and 12 give it a “hold.” Only three analysts call Micron stock a “sell.”
Apart from the stocks mentioned above, there are some high-yielding dividend stocks in the semiconductor industry, which are a must-buy in the current recessionary scenario.