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After Yesterday's Big Tech Selloff, Should Investors Be Concerned?

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Monday saw shares of some of the largest tech firms decline, coming a day after the release of a Wall Street Journal report that said the US Treasury Department is seeking to restrict Chinese investment in US technology. Netflix (NFLX - Free Report) , Facebook (FB - Free Report) , Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) and Nvidia (NVDA - Free Report) were all down between roughly three to seven percent. 

All's Fair in Love and War

According to the report, the new rules would prevent firms with at least 25% Chinese ownership from investing in US companies with “industrially significant technology.” The news left the market feeling nervous, with the DJIA slipping 1.7%, NASDAQ down 2.5% and the S&P 500 down 1.8%, respectively. As our team reported, China felt the burn as well, losing US$514 billion in market value last week in response to President Trump’s threat of $200 billion in additional tariffs on the nation.

The market's reaction is a testament to the increasingly interdependent relationship between the world’s two largest economies. As threats between the US and China have continued to escalate, concerns about a potential trade war with China have continued to grow. While investors were initially focused on the effect of restrictive trade policies on firms in the automotive and industrial sectors, recent developments have thrust tech into the spotlight as well. Could this be the beginning of a broader downward trend? Based on Tuesday morning’s market movement, it appears unlikely.

By the Numbers

By the closing bell on Monday, Netflix, Facebook, Amazon, Alphabet, and Nvidia had slid 6.5%, 2.7%, 3.1%, 2.6%, 6.9% and 4.7% respectively. However, all of the aforementioned stocks recovered some of their losses Tuesday morning, with Netflix notably up 3.4% about an hour after the opening bell.

Netflix does not directly sell its services in China. However, it did sign a partnership with Baidu (BIDU - Free Report) subsidiary iQiyi (IQ - Free Report) , a local streaming platform, in April of last year. The deal is a content licensing agreement that involves a subset of Netflix content, including the firm’s hit series Stranger Things and Black Mirror. Although it has made numerous efforts, Netflix has been unable to directly access the over 700 million online users in China.

While Amazon has a presence in China, it faces heavy competition from larger local competitors JD.com (JD - Free Report) and Alibaba (BABA - Free Report) subsidiary Taobao, both of which are popular e-commerce platforms. Alphabet Inc. made news last week when it announced a $550 million investment in JD. The investment is a new strategic partnership aimed at developing better retail infrastructure in multiple markets, including Southeast Asia, as well as helping expand Google’s e-commerce presence in the region.

Earlier this week, Facebook came into the news with headlines that China would lift part of its online firewall to give tourists in its southern Hainan island access to the service, alongside YouTube and Twitter (TWTR - Free Report) . It is currently unclear if locals will be able to access the service as well. Another major headline came earlier in June when a New York Times investigation found that Facebook participated in a data-sharing program with 60 phone makers, including China’s Huawei. Facebook is currently restricted in most of China but is accessible in Hong Kong. However, the firm does earn notable revenue from Chinese advertisers who use the platform to market their products.

Of all the major tech firms mentioned, Nvidia has the largest exposure to China. The firm has a partnership with Baidu in which its Volta GPUs and Drive PX 2 AI supercomputer are used as part of Baidu’s cloud-computing, self-driving and home assistance initiatives. As of the firm’s most recent earnings report in late April, the United States represented its fourth largest source of revenue. Taiwan was first with $967 million and China was second with $754 million (or 23.5%) of the firm’s $3.2 billion in overall revenue.

So Should Investors Be Concerned?

While these tech firms are all involved in some level of activity in China, in most cases it is not significant enough to warrant serious concern in the face of prolonged disagreement between the US and China. No one can know for sure if a trade war will take place. For now, Tuesday’s market movement reflects positive investor sentiment after Peter Navarro, one of President Trump’s top trade advisors, stated that “There are no plans to impose investment restrictions on any countries that are interfering in any way with our country. This is not the plan.” 

But in the event that the conflict escalates, investors should remain vigilant, particularly so with Nvidia, which has otherwise performed very strongly this year. While it currently sits at a Zacks Rank #1 (Strong Buy), this could change in the event that China, one of its largest revenue streams, be jeopardized in any way. 

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