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4 Chip Stocks to Gain From China's Reliance on US Tech

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Chip stocks witnessed a strong rally in 2019, largely driven by investors’ optimism over a U.S.-China trade deal. This is because these companies have considerable exposure to the world’s biggest chip market — China.

In addition, developments in the semiconductor industry last year brought the significance of U.S. chip-enabled products to the forefront for many crucial Chinese tech products and supply chains.

These developments coupled with an improving U.S.-China trade ties are bound to drive the semiconductor industry.

American Chip Design Tech is Paramount for China: Here’s Why

A major factor driving the importance of U.S. technology for China is the country’s reliance on specific American technologies for its supply chains.

To look at this arrangement closely, one may note that the development of these supply chains requires tools that produce the hardware and software that design the integrated circuits that essentially make computer chips function. Therefore, the functionality of China’s entire technology-intensive supply chains comes down to the operations in the American chip design tools industry.

It is imperative to consider the significance of global semiconductor firms, and more specifically, American chipmakers here. This is because the chip design tools industry is dominated by just four U.S.-based companies, namely, Synopsys, Inc. SNPS, Cadence Design Systems, Inc. CDNS, ANSYS, Inc. ANSS and Mentor Graphics. These four companies control 90% of the world market (as of 2018), according to S2C data.

Semiconductor Stocks at the Forefront

This dependence on prominent U.S. chipmakers naturally brings semiconductor stocks to investors’ watch list. Since chipmakers comprise the majority of top U.S. companies with revenue exposure to China, these are most sensitive to the upcoming U.S.-China trade agreement.

The much-awaited phase-one U.S.-China trade agreement is set to be signed on Jan 15, which promises to de-escalate the tariff war. The deal is also expected to protect U.S. intellectual property and drive penetration of U.S. companies into the fast-growing Chinese markets.

According to Evercore ISI, China accounted for 35% of global semiconductor sales in 2018. Therefore, with de-escalation in the U.S.-China trade war, one can anticipate a possible rally in semiconductor stocks in the near future as demand for chip-enabled products gain traction in both the countries.

Second, semiconductors form an integral part of almost every crucial, in-demand tech product at present. These chip-enabled products infiltrate everything, including those under the tariff fire right now. The upcoming U.S.-China trade deal is likely to help in that aspect as well.

4 Chip Stocks to Buy in 2020

We have chosen four semiconductor stocks that are well positioned to gain this year from the aforementioned factors. All of these stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Synopsys, Inc. is a provider of electronic design automation software products that are used to design and test integrated circuits. The company has a prominent market share (36.5%) in the $8.5-billion chip design tools industry, according to S2C.

Synopsys’ core competency is its electronic design automation tools (EDA) that help design chips and the systems that create these chips. The company’s EDA tools make up for 60% of its revenues. From initial design to verification, Synopsys’ EDA software serves hardware designers.

The Zacks Consensus Estimate for Synopsys’ current-year earnings has moved 4.6% north over the past 60 days. Shares of this Zacks Rank #1 company have risen 71.6%, outperforming the Zacks Computer - Software industry’s rise of 49.8% over a year. You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA Corporation (NVDA - Free Report) is a visual computing company. The Santa Clara, CA-based chip supplier is well-known for its graphics processing units for the gaming industry and components for the mobile computing and automotive markets, etc.

In December 2019, the company announced a string of deals with some of China’s biggest technology giants. The company entered into deals with e-commerce giant Alibaba Group Holding Ltd, search engine provider Baidu Inc and ride-hailing service Didi Chuxing.

According to Reuters, these companies are using NVIDIA’s chips for activities such as product recommendations, developing self-driving vehicles and back-end data centers. The company’s shares hit a two-year high on Dec 18 following the announcement.

NVIDIA carries a Zacks Rank #2. The Zacks Consensus Estimate for the company’s current-year earnings rose 4.1% over the past 60 days. Shares of the company have risen 83.8%, outperforming the Zacks Semiconductor - General industry’s rise of 50.2% over a year.

Photronics, Inc. PLAB is a manufacturer and marketer of photomasks. Photomasks are an important component used in the manufacture of semiconductors.

In July 2019, the company spent $320 million on two new facilities in Xiamen and Hefei to research, develop, manufacture and market photomasks toChina’s electronics industry. The facilities plan to supply their components to the integrated circuit and flat panel display industries in China.

Photronics carries a Zacks Rank #2. The Zacks Consensus Estimate for the company’s current-year earnings has climbed 23% over the past 60 days. Shares of the company have risen 66.5%, outperforming the S&P 500’s rise of 30.7% over a year‘s time.

NXP Semiconductors N.V. NXPI is a provider of high-performance mixed signal solutions for radio frequency, analog, power management, interface, security and digital processing products. Being a diversified chipmaker, NXP Semiconductors provides crucial industrial sector-specific components.

In fact, in December 2019, Chinese chip designer Goodix Technology was allowed by the country’s antitrust regulator to acquire NXP Semiconductor’s Voice and Audio Solutions (VAS) for $165 million in cash. This move will enable Goodix Technology to gain a stronger foothold in the mobile and IoT industries and increase the reach of its research and development in audio applications.

NXP Semiconductors currently carries a Zacks Rank #2. The Zacks Consensus Estimate for the company’s current-year earnings has moved up 0.5% over the past 60 days. Shares of the company have risen 76.8%, outperforming the Zacks Semiconductor - Analog and Mixed industry’s rise of 53.9% over a one-year period.

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