Yesterday, the US Trade Representative stated in a press release that the US would delay its tariff increase on certain imported goods from China (MCHI) (FXI). Earlier, President Donald Trump had threatened to impose a 10% tariff on the remaining $300 billion worth of Chinese imports starting in September. However, the tariff hike is now delayed until December 15.

The goods in the list include laptops, cell phones, video game consoles, toys, computer monitors, and specific footwear and apparel. Some of the products have been removed from the tariff list for safety and other reasons.

Who benefits from the China tariff delay?

The recent delay in the tariffs has sent a wave of optimism throughout the tech sector—especially the semiconductor industry. All three major indexes spiked yesterday on the tariff delay news. The Dow Jones Industrial Average rose 1.44%, while the S&P 500 jumped nearly 1.5%. The tech-driven Nasdaq Composite climbed 1.95% on the day.

Apple (AAPL) stock, which has fallen 1.5% in August as of yesterday, gained 4.23% on August 13. Apple designs products such as the iPhone in the US (SPY) but assembles them in China. Last month, Apple decided to move some of its production out of China, but the process might take some time. The delay in the China tariffs has relieved Apple investors for at least a little while. Apple’s suppliers, including Skyworks Solutions (SWKS) and Qorvo (QRVO), also celebrated with gains of 2.83% and 3.33%, respectively, on August 13.

US chip makers Qualcomm (QCOM) and Western Digital (WDC) gained 3.41% and 2.64%, respectively. Semiconductor giants Intel (INTC), Micron Technology (MU), and NVIDIA (NVDA) also jumped 2.72%, 4.84%, and 3.04%, respectively, on the tariff delay.

Semiconductor companies are more sensitive to the trade war because they have high exposure to China. According to Morgan Stanley strategists in a CNBC report, semiconductor and semiconductor equipment companies generate more than 50% of their revenues from China. As per Morgan Stanley’s report, chip maker Qualcomm has the second-highest revenue exposure to China at 65%. Micron, Intel, and NVIDIA also have very high revenue exposure to China.

Chip makers struggle due to US-China trade spat

The US-China tariff war, which started in 2018, has led to a significant sell-off in the financial markets recently. The broader market indexes the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average have fallen 1.8%, 1.9%, and 2.2%, respectively, in August as of yesterday.

Soon after President Trump announced a new round of tariffs on Chinese goods starting on September 1, China devalued its currency to its lowest level since 2008 in retaliation. China also reportedly restricted the purchase of US agricultural products. China even announced that it would impose tariffs on farm goods purchased from the US after August 3. On August 9, Trump stated that he might cancel the meeting for trade negotiations with China that’s scheduled for September.

Let’s take a look at how the trade war uncertainty has impacted semiconductor stocks.

Micron

Micron generated about $20.3 billion worth of revenue last year, 50% of which came from China. Therefore, the US-China trade war has likely affected Micron severely.

The ban on US companies’ trading with Huawei is also hurting Micron. Huawei contributed nearly 13% of Micron’s revenue in the first half of its fiscal 2019. Besides trade war concerns, Micron has been struggling with falling memory and storage prices. The company has been posting falling revenue and sluggish earnings growth sequentially.

Intel

Leading semiconductor company Intel has also been hit by the ongoing US-China trade war and other global uncertainties. Intel generates around 26.6% of its sales from China, which is its largest market. The chip maker also expects pricing pressure in negative-AND chips to weigh on its performance.

Intel is also facing competition from Advanced Micro Devices (AMD) in the CPU space. The recent launch of AMD’s first 7 nm (nanometer) CPU server, EPYC Rome, is likely to hurt Intel’s dominance in the CPU market. Intel has plans to launch its 14 nm Cooper Lake Xeon processors next year. Intel is also developing its 7 nm processors, which are set to release in 2021.

In April, Intel decided to exit the 5G smartphone modem business. Last month, Intel agreed to sell the majority of its modem business to Apple for a value of $1 billion. However, Intel will retain some of the business to develop 4G and 5G modems. Intel will now focus on building 4G and 5G modems for PCs, autonomous vehicles, and Internet-of-Things devices.

NVIDIA

NVIDIA is also sensitive to trade war tensions, as the increased tariffs could significantly hurt its international business. The company has significant gaming exposure in China and generates around 23% of its revenue from China. More than 50% of NVIDIA’s total revenue comes from gaming. Apart from trade war fears, the cryptocurrency bubble’s burst has led to a double-digit decline in gaming revenue in the last two quarters. NVIDIA, which will release its earnings on August 15, also competes with AMD in the graphics processing unit space.

The delay in tariffs will give these companies some breathing room to focus on other vital areas of growth.

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