3 Tech Stocks to Watch Amid the Chinese Spying Scandal

China's biggest tech suppliers are getting hammered on reports of spying

Source: Shutterstock

The “Chinese Spying Scandal” is roiling markets today, but some companies are more vulnerable than others and this has placed several notable tech stocks back in the spotlight.

The scandal reported by Bloomberg is convenient for the Trump administration, supporting its trade war and bogeyman of China.

Never mind that our own spy agency has been inserting malware into laptops for years and even trying to design plants that spy on people.

That’s the way jingoism works. What’s good when we do it is evil when others do it.

Stock in companies impacted by the “Chinese spying” story are falling, but untangling the U.S. and Chinese tech sectors, which have become completely interdependent in this century, may prove impossible.

Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and the other Cloud Czars are dependent on low-cost Chinese hardware, created by cheap labor and lax environmental standards, to build cloud data centers that are competitive with Chinese centers. The Chinese, in turn, are dependent on American software and hardware designs for their own progress.

Super Micro Computer (SMCI)

Super Micro Computer (SMCI) tech stocks
Source: Shutterstock

Out of all the tech stocks out there, Super Micro Computer (OTCMKTS:SMCI), based in San Jose, CA, is the most vulnerable to this story, and its stock dropped 41% on the news.

Supermicro builds servers for data centers and is being accused directly of inserting a chip no bigger than a grain of rice into its servers that allows those who know about it to create a backdoor into networks containing it. Presumably, the chip was ordered and is controlled by China’s People’s Liberation Army.

Apple, which at one time had an order for 30,000 Supermicro servers for its cloud data centers, reportedly cancelled that contract in 2016. That’s right about the time Supermicro stock rolled over. Shares that were trading at nearly $29 near the end of that year were trading at $20.61 before the Bloomberg story came out.

Now, SMCI stock trades around $12.60.

Supermicro was already in deep trouble. Despite estimated 2018 sales of about $3.3 billion, and profits of $1.07 per share, it repeatedly delayed filing of its 2017 financial statements over when it recognized revenue, and suffered through a NASDAQ de-listing as it sought extensions on its loans. This is why the shares are now being quoted only on over the counter markets.

Brave investors who buy today can get a price-to-earnings ratio of under 12, and an estimated P/E for 2019 of under 6.

Hon Hai Precision Industry (HNHPF)

Hon Hai Precision Industry (HNHPF) tech stocks
Source: Apple

Hon Hai Precision Industry (OTCMKTS:HNHPF), based in Taiwan, is popularly known as Foxconn. Their contracts for manufacturing Apple iPhones brought them a market cap of over $138 billion at their peak in the summer of 2017, but it has been all downhill since then. HNHPF shares now trade around $5 each.

This is despite earnings of nearly $4 billion for the first six months of 2018, and about $38 billion in revenue for the June quarter. The P/E ratio is down to 10 and the yield, on a 13-cent-per-share dividend, is up to 2.56%, because the company is just not growing.

As with other iPhone suppliers, Hon Hai has been struggling with more-expensive phones, since their compensation is based on the number of phones they make.

The company mainly operates on mainland China and in Taiwan, but has reportedly been considering construction of two U.S. plants to avoid the growing trade war. The company already has eight U.S. facilities, including one under construction in Wisconsin that received extensive state aid.

Hon Hai has been working to diversify away from Apple and recently began building a robot for children called “Kebbi.” Whether that can save HNHPF stock is still up in the air.

Taiwan Semiconductor Manufacturing (TSM)

Taiwan Semiconductor Manufacturing (TSM) tech stocks
Source: Shutterstock

The largest and probably one of the least vulnerable tech stocks touched by the scandal is Taiwan Semiconductor Manufacturing (NYSE:TSM), a chip foundry whose stock has been on fire throughout the decade and now threatens to overtake Intel (NASDAQ:INTC) in market cap.

Taiwan Semi has the best chip foundries in the world and has recently begun sampling Advanced Micro Devices (NASDAQ:AMD) chips built with a 7 nm process at a time when Intel is delaying delivery of 10 nm products until late next year.

In the semiconductor race that’s a huge lead and is largely responsible for AMD’s rise of 153% just this year. However, TSM stock is up less than 2% and opened for trade, Oct. 5, below $42.50 … giving it a P/E ratio under 19 despite its 3.05% dividend yield.

The reason, as with Hon Hai, is a shortage of growth. The company had $31.5 billion of revenue for 2017 and $15.5 billion for the first two quarters of 2018, indicating growth has stalled. This is despite a balance sheet that is healthier than Intel’s — it had six times more cash than debt at the end of June — and operating cash flow that is approaching $20 billion each quarter.

A healthy company, with a product that can’t be replaced by U.S. supplies, should be a bargain hunter’s delight, but when trade wars rumble, it’s a trade for only the brave.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN.


Article printed from InvestorPlace Media, https://investorplace.com/2018/10/3-tech-stocks-to-watch-amid-chinese-spying-scandal/.

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