The trade-war between the United States and China peaked in the first-half of 2019, following President Trump’s imposition of an additional 25% in May to which China retaliated with its own tariff on U.S. goods.
The high hopes of a positive development on the trade war front in second-half of 2019 now seems to be evaporating rapidly on latest not-so-welcome developments.
A recent tweet from President Trump suggesting trade negotiations ahead of talks with China President Xi had raised optimism on a plausible truce. However, there is a simultaneous discussion on imposition of further tariffs of approximately $300 billion on Chinese imports primarily on consumer goods, in case conciliation fails.
Technology stocks, in particular, have been coerced to lose out on international revenues owing to high tariffs imposed by U.S. administration on China. Majority of technology companies have trimmed their outlook for fiscal 2019 on various aspects of trade war concerns, be it tariffs or blacklisting.
The U.S. government recently announced blacklisting of several China-based companies. Markedly, blacklisting of Huawei affected prominent semiconductor stocks including Broadcom, Skyworks, Qorvo, Lumentum, among others.
Year-to-Date Price Performance
Huawei and Related Risks Impact Google
Alphabet’s GOOGL Google has reportedly moved major part of motherboard production to Taiwan. The company is also considering shifting the manufacturing of Nest-related hardware from Beijing to deal with tariffs.
The search giant had to suspend business with Huawei, as a result of which Huawei’s next series of smartphones will reportedly not have access to Gmail, Google Play Store and YouTube apps. There is uncertainty whether Android operating system will power Huawei’s next series of smartphones, which ultimately leads to loss of business for Alphabet.
AMD’s JV at Risk
A fresh round of blacklisting of a quintet of China-based supercomputing companies is likely to affect Advanced Micro Devices AMD business. The decision is likely to affect AMD’s joint venture named THATIC (Tianjin Haiguang Advanced Technology Investment Company). The JV involves two companies Hygon and Haiguang Microelectronics, both of which are now blacklisted.
Through the THATIC JV, AMD realized $86 million or 1.3% of total revenues in 2018. The impact of the ban on AMD’s JV is likely to weigh on margins, as it misses to register the “IP-related revenues”, at least in the near term. Notably, China (including Taiwan) contributed 38.9% to total revenues in 2018.
Intel & Apple Likely to Restructure Supply Chain
During first-quarter 2019 earnings conference, Intel INTC slashed guidance for 2019 owing to trade-war concerns. Reportedly, the US administration has banned the semiconductor giant from selling its Xeon processors to China, which is an overhang.
Moreover, the company is apparently reconsidering its supply chain to deal with the trade war impact.
Further, Apple AAPL is reportedly reviewing transition of 15-30% of production base from China to other Southeast Asia facilities. The iPhone maker along with companies like Fitbit and Dollar Tree, among others, has asked the US government to reconsider the additional $300 billion worth of tariff imposition.
Notably, reduced demand for iPhone in China has severely affected Apple’s sales over the last couple of quarters.
Amazon Likely to Lose Merchants
Amazon AMZN would have likely not made it to the list, given the diverse end-markets providing it a hedge against the tough times. However, if the new set of tariffs is imposed, consumer sales are likely to be impacted, taking a toll on its merchants with small businesses.
Moreover, the presence of cloud players like Alibaba and Tencent in China almost nullifies the dominance of Amazon Web Services in the country.
Oracle and IBM Being Substituted
Oracle ORCL and International Business Machines Corporation's IBM expertise in database management enterprise software is being challenged by China-based startups like PingCAP. The rising adoption of PingCAP’s offerings post Huawei blacklisting is fueling the “Buy China” wave.
Per Bloomberg, major companies including Xiaomi, iQIYI Inc., food delivery company Meituan and bike-sharing portal Mobike, selected PingCAP’s services over Oracle and IBM’s solutions. Reduction in China-based clientele is likely to weigh on growth prospects of Oracle and IBM.
The opportunity costs of tariff imposition are huge and once they trickle down to consumers, the entire economy stands to suffer.
The hopes on trade war truce, and talks on Huawei blacklisting, ahead of the impending meeting of Trump and Xi is keeping investors on tenterhooks.
Currently, Oracle carries a Zacks Rank #2 (Buy), while AMD, Intel, Amazon, Alphabet, Apple, and IBM carry a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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