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Will Tech Companies Manage to Survive a U.S.-China Trade War?

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The U.S-China trade spat has started taking its toll on tech companies, particularly chipmaker stocks. On Jun 19, President Donald Trump asked the United States Trade Representative to identify Chinese goods worth $200 billion for additional tariffs. Consequently, China too said that it would have to take comprehensive measures to counter U.S. trade moves.

This has resulted in stocks tumbling once again. Given that China accounts for a large portion of revenues for a number of U.S. tech companies, which include chipmakers, mobile phones and technology-based service providers, there are high chances of these players suffering significantly.

Trade War Fears Escalate

On Jun 15, Trump announced tariffs on $50 billion of Chinese goods including semiconductors. China wasted no time in retaliating with tariffs on $34 billion U.S. goods. Markets were further rattled on Jun 19, after Trump asked the United States Trade Representative to identify Chinese goods worth $200 billion for additional tariffs of 10%.

This further escalated trade war fears, resulting in huge sell offs. Tech stocks have been suffering particularly as China accounts for a large portion of revenues for a number of U.S. companies.

Apple Fears the Worst Bite

Trump’s announcement of 25% tariffs on up to $50 billion of Chinese goods including semiconductors could make Apple, Inc. (AAPL - Free Report) one of the biggest victims of a U.S.-China trade war. Apple is the most successful U.S. tech company in China. In 2017, the iPhone maker generated approximately 20% of its revenues from China, shipping more than 41 million iPhone to China in 2017. Moreover, Apple operates its services like Apple Music and App Store in China.  

A trade war could result in China banning Apple’s services, which it did in 2016 by shutting down iTunes Movies and iBooks Store. Services are becoming an integral part of Apple’s business in a slowing smartphone market. Another increasing concern is: what if China bans Apple citing concerns of national security just like the United Stated cautioned customers not to buy Chinese mobile phone maker Huawei on fears of being spied by the Chinese? This would hurt Apple’s business severely. Shares of Apple declined 1.6% on Jun 19.

Chipmakers to Bear the Brunt

Chipmakers with significant exposure to China were hit on Tuesday, following Trump’s announcement of 25% tariffs on semiconductors. Telecommunication equipment maker Lumentum Holdings Inc.’s (LITE - Free Report) shares tumbled 3%, while Qualcomm Incorporated (QCOM - Free Report) plummeted 0.8%.

The United States is the largest semiconductor manufacturing country, with China being its biggest market. Naturally, higher tariffs will take a toll on the revenues of these semiconductor manufacturers. Qualcomm has tie-ups with a large number of Chinese companies, including Huawei. Qorvo, Inc. (QRVO - Free Report) too generates its almost 60% of its revenues from China. The company’s shares tumbled 2.7% on Tuesday.

Similarly, other semiconductor giants like Skyworks Solutions, Inc. (SWKS - Free Report) and Qualcomm too depend heavily on the Chinese market. In fact, Apple and Intel Corporation (INTC - Free Report) are among the top 16 U.S companies that generated a total of $105.5 billion from China in 2017. Qualcomm, Broadcom Inc. (AVGO - Free Report) and NVIDIA Corporation (NVDA - Free Report) generated respectively 16.6%, 9.5% and 1.9% of their revenues from China. Shares of Skyworks, Intel, Broadcom and NVIDIA declined 1.6%, 0.5%, 0.7% and 1.9%, respectively, on Tuesday. NVIDIA sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Bottom Line

Tech stocks have been driving markets for a while now. However, the U.S.-China trade spat has been rattling markets, with tech stocks, particularly semiconductors, at the helm of the carnage. Tech companies depend heavily on China, which accounts for a large portion of their revenues, and retaliatory tariffs would make things worse that they already are.  

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