Until the past couple weeks, the semiconductor stocks were in rally mode. But this has come to a screeching halt. From June 18 to now, the PHLX Semiconductor Sector index has gone from 1,438 to 1,328.
Keep in mind that the semiconductor stocks are on pace for the first negative quarter in three years.
At the heart of this, of course, is the battle royal between President Trump and China. Trump is concerned about China’s massive effort to bolster its home-grown technology industry, called “Made in China 2025.”
In retaliation for their effort, he has aggressively imposed tariffs on billions of dollars of goods, some of which are targeted at the semiconductor. China, in turn, has retaliated.
Yes, there are fears of a trade war.
It’s difficult to gauge the potential impact on semiconductor stocks, at least in the short-term, there is likely to be disruption. Many semiconductor companies derive substantial amounts from the Chinese markets.
There is also the threat to the delicate global supply chain.
So then, what might be some of the semiconductor stocks that are at risk? Well, let’s take a look at three:
Risk #1: Intel
Given the huge scale of Intel Corporation (NASDAQ:INTC), it should be no surprise that the company relies heavily on the Chinese market. The exposure is roughly 23%.
Something else: The US-China dispute has come at a terrible time. Recently INTC’s CEO, Brian Krzanich, departed the company because of a relationship with an employee.
Unfortunately, there has been no immediate replacement name. This is likely to mean that the company could be flat-footed for awhile.
In the meantime, INTC is feeling the pressure on its core PC and data center business.
Companies like Advanced Micro Devices, Inc. (NASDAQ:AMD) and Nvidia Corporation (NASDAQ:NVDA) have been making inroads in these areas.
In fact, during the past week, various Wall Street firms have downgraded INTC.
For example, Bernstein’s Stacy Rasgon reduced her price target from $54 to $42, noting: “It is becoming increasingly apparent that the structural issues we have promulgated for years are becoming ever obvious to investors.”
Risk #2: Applied Materials
A full-blow trade war could be particularly harmful for a company like Applied Materials, Inc. (NASDAQ:AMAT).
First of all, if the revenues decline in the semiconductor industry, then the first expenditures to be cut would likely be capital investments.
And this goes directly to AMAT. The company manufactures equipment, services and software to the semiconductor industry.
Next, AMAT gets a considerable amount of its revenues from China. Keep in mind that the company has plans to invest $615 million to build a facility in the country.
No doubt, this is a key example of the importance of the Chinese market.
According to AMAT CEO Gary Dickerson, on the latest earnings call: “China is definitely a very strong region for us if we look at our share in semi, display, service, it’s one of the strongest regions.”
Risk #3: Qualcomm
QUALCOMM, Inc. (NASDAQ:QCOM) is certainly dependent on China. According to a report from Morgan Stanley (NYSE:MS) the company has a 52% exposure to the country.
But QCOM has already felt the impact from the trade tensions. QCOM’s proposed acquisition of NXP Semiconductors NV (NASDAQ:NXPI) is still being held up by Chinese regulators.
Basically, if the deal falls through, it would be a major blow for QCOM. NXP is a top developer of chips for markets like autonomous vehicles, security and digital networking.
Finally, QCOM is still having challenges defending its core licensing model. The company is the subject to lawsuits, such as from Apple Inc. (NASDAQ:AAPL).
In other words, if there is an adverse legal decision, it could make it much tougher for QCOM to generate revenues from its intellectual property.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
