Semiconductor Stocks Hit by China Trade War Escalation

Semiconductor stocks already had a rough May when President Donald Trump hiked tariffs on $200 billion of Chinese imports to 25% from the previous 10%. This included imports of integrated circuits imported from China.

Most semiconductor companies mitigated the impact of these tariffs by shifting production outside China. However, a bigger blow came to semiconductor stocks when Trump imposed a trade ban on Huawei and its affiliates, as well as some US supercomputing companies.

The recent earnings season saw all semiconductor companies discuss the Huawei ban. Most of them mitigated the impact of the ban by identifying components that did not risk national security. However, companies selling advanced 5G-related technology—Xilinx (XLNX), Intel (INTC), and Qualcomm (QCOM)—found no relief.

Now, Trump has threatened to proceed with his administration’s plan to levy a 10% tariff on the remaining $300 billion of Chinese imports on September 1. This action would put consumer goods like smartphones, laptops, and other consumer electronics in the tariff bucket.

The tariff will not directly hit chip companies, as they have moved their manufacturing activities outside China. However, they will be impacted by a slowdown in end-consumer demand.

The new tariffs could make consumer goods more expensive during the back-to-school season when demand for smartphones, PCs, and graphics cards rise. The tariffs also come at a time when Apple (AAPL) launches its flagship iPhone upgrades.

Last year, the second round of tariffs went into effect on September 24. These tariffs included semiconductors. Datacenter companies accelerated their purchases and stocked up sufficient inventory for the next few quarters.

There is a possibility that American firms might buy ahead of these tariffs, resulting in a significant increase in sales this month. However, sales could dip from September onward, subduing hopes of a second-half rebound in semiconductor demand.

The overall smartphone market is weak, with Apple being the most affected. According to IDC, global smartphone shipments fell 2.3% YoY in the second quarter, with Apple’s iPhone shipments down 18.2%.

Gartner expects global smartphone shipments to fall 3% in 2019. The new round of tariffs should add to the smartphone declines.

On August 2, Apple stock fell 3%, and its chip suppliers took a bigger hit. The semiconductor content per smartphone increases with every passing generation. So, chip companies have a higher exposure to smartphone shipments than smartphone makers.

Semiconductor stocks Qorvo (QRVO), Broadcom (AVGO), and Skyworks (SWKS) fell more than 3% on August 2. These stocks were also impacted by their high exposure to Huawei.

Skyworks earns more than 80% of its revenue from China and 47% of its revenue from Apple. Next week, the chipmaker is set to report its earnings for the third quarter of fiscal 2019, where it will provide clarity on the impact of a new tariff on its earnings. Apple supplier Cirrus Logic (CRUS) fell 2% today after rising 16% yesterday on earnings and guidance beat.

The new round of tariffs could include consumer electronics such as PCs and laptops. Semiconductor stocks such as Advanced Micro Devices (AMD) and NVIDIA (NVDA) have high exposure to the gaming hardware market.

China is the biggest market for gaming, including gaming laptops, desktops, and gaming GPUs (graphics processing units). AMD and NVIDIA’s stock prices fell over 2% on August 2 over concerns of any retaliation from China.

AMD stock fell more than 10% in the last two days due to a guidance miss by a large margin due to weaker-than-expected game console demand. The new tariff could make it worse. On August 15, NVIDIA plans to provide an update on the impact of the China trade war in its upcoming earnings for the second quarter of fiscal 2020. Intel stock fell 1.64% as gaming laptops have been driving the growth of Client Computer, its biggest segment.

Overall, the uncertainty around the China trade war continues to haunt semiconductor stocks. The prolonged trade war is shifting the global semiconductor supply chain. The industry will adjust to the trade war in the long term with growth coming from 5G, AI (artificial intelligence), autonomous cars, and IoT (Internet-of-Things).

Texas Instruments’ CFO, Rafael Lizardi, refers to historical data that has proved then and now that any type of industry downturn lasts for four to five quarters, and that growth resumes in the sixth quarter. This means that next year could be a strong year for semiconductors.