Micron Technology (MU - Free Report) was hit badly in Tuesday’s trading session following a report that a Chinese court has suspended its sale of memory products in that country, citing violation of patents held by Taiwan's United Microelectronics Corp . Shares of MU fell as much as 8% on the news but recovered slightly to close on the day at down 5.5%. The other stocks in the industry also felt the pinch.
The news came amid accelerating trade tensions between Washington and Beijing, with a tit-for-tat threats, which have already led to a bloodbath in the semiconductor space. This is especially true as the United States announced a 25% tariff on $34 billion worth of Chinese goods including many products in the semiconductor supply chain effective Jul 6. Additionally, Trump is seeking to curb China’s technology investments in the United States.
The United States is the largest semiconductor manufacturing country, with China being its biggest market. As such, a higher tariff will hit the revenues and profitably of these semiconductor manufacturers. Per Morgan Stanley equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52%.”
Despite this, the outlook for the sector is solid. After witnessing the highest growth in 14 years, the global semiconductor industry is on track to grow 12.4% this year, according to the World Semiconductor Trade Statistics (WSTS).
Semiconductors are the most important drivers of overall technology growth as these are used in cars, electronic gadgets, planes and weapons. Robust demand for memory chips and other semiconductor products -- owing to the rapid adoption of cloud, Internet of Things, autonomous cars, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence, cryptocurrencies, and other advanced information technologies -- will fuel huge growth in the space.
Additionally, the deployment of 5G (fifth-generation) technology — the next wireless revolution — will likely create further opportunities. The waves of mergers and acquisitions will also provide further impetus to the space. Trump’s tax reform is another tailwind. Big semiconductor companies hoard huge cash overseas and are poised to benefit the most from the reduced tax rates.
Micron Versus Other Stocks
The latest trade friction wiped out most of Micron’s gains made earlier in the year pushing its shares down 13.4% in a month. However, the stock is up 25.2% from a year-to-date look, and has crushed the broad electronic-semiconductor market by a wide margin. It carries a top Zacks Rank #1 (Strong Buy) and has a solid Growth and Value Score of A and B, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Micron saw positive earnings estimate revision of 19 cents for fiscal (ending August 2018) over the past 30 days and has an estimated whopping growth rate of 136.29%. Revenues are also expected to grow 48.25% for this year. Yet, this Idaho-based chipmaker is immensely vulnerable to tariff threats as it generates 51% of its revenues from Mainland China.
Given this, we have highlighted a few other #1-Ranked semiconductor stocks that look attractive picks at present given their strong fundamentals and lower exposure to China.
Microchip Technology Incorporated (MCHP - Free Report) : This Arizona-based company develops, manufactures and sells specialized semiconductor products used by the customers for a wide variety of embedded control applications. The stock lost 12.8% in a month and has 30% exposure to China. It saw positive earnings estimate revision of 16 cents for the fiscal (ending March 2019) over a month, and has an expected earnings growth of 20.00%. Microchip Technology has a Growth Score of B.
NVIDIA Corporation (NVDA - Free Report) : This California-based company is a worldwide leader in graphics processors and media communications devices. The stock has shed 10.7% in a month and has 20% exposure to China. It has seen no earnings estimate revision in a one-month period for the fiscal (ending January 2019) and has an expected earnings growth rate of 61.18%. NVIDIA has a Growth Score of A (read: Better Buy: Micron vs. Nvidia Stock).
Diodes Incorporated (DIOD - Free Report) : This Texas-based company is a leading manufacturer and supplier of high-quality discrete and analog semiconductor products, primarily to the communications, computing, industrial, consumer electronics and automotive markets. The stock has shed 8.2% over the past month and has a minimal exposure to China. It has seen positive earnings estimate revision of five cents for this year over a month and has expected earnings growth of 49.64%. DIOD flaunts a top Growth Score of A.
Mellanox Technologies Ltd. (MLNX - Free Report) : This California-based company is a leading supplier of semiconductor-based, interconnect products to world-class server, storage, and infrastructure OEMs servicing Fortune 500 data centers, the world's most powerful supercomputers, and mission critical embedded applications. It has lost 3.85% in a month and has a minimal exposure to China. It has seen no earnings estimate revision over the past 30 days for this year and has an expected earnings growth rate of 90.35%. Mellanox Technologies flaunts a top Growth Score of A.
Vishay Intertechnology Inc. (VSH - Free Report) : This Pennsylvania-based company is one of the world's largest manufacturers of discrete semiconductors (diodes, MOSFETs, and infrared optoelectronics) and passive electronic components (resistors, inductors, and capacitors). The stock has gained 11.9% in a month and has a minimal exposure to China. The Zacks Consensus Estimate for 2018 has moved up by a penny over the past 30 days, representing year-over-year earnings growth of 25.17%. Vishay Intertechnology has a Growth Score of B.
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