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Trump Gets Requests for Huawei License: Chip Stocks in Focus

Zacks Equity Research

The Trump administration has been receiving license requests from more than 130 U.S. suppliers, chipmakers, software companies and other firms seeking permission for non-security sales to Chinese telecom equipment manufacturer — Huawei Technologies Co Ltd. — according to a Reuters report (read: Global Stimulus & Huawei Relief Boost Markets: ETFs in Focus).

Huawei Ban: The Story So Far

On May 15, Trump signed an executive order to declare national emergency. Post the order, the U.S. Department of Commerce announced the addition of Huawei Technologies and its affiliates to the Bureau of Industry and Security Entity List. The order effectively barred U.S. firms from buying or selling any telecom equipment to firms like Huawei, which are deemed to pose threat to national security.

Analysts expect the ban to largely impact semiconductor and software companies. In this regard, Chris Caso, a semiconductor analyst at Raymond James said, “it goes without saying that any such action would be terrible for any Huawei supplier, and for the semiconductor industry at large.”

However, in late-June, the Trump administration urged companies to apply for licenses to supply non-sensitive items to Huawei that can be replaced by foreign competitors.

A Glimpse at Trump’s Huawei Reprieve

President Trump recently postponed the order to ban U.S. firms from providing supplies to Huawei for the second time since May. The “temporary general license” will be stretched for Huawei by 90 days and renew an agreement that was scheduled to lapse on Aug 19.

Huawei & US Chip Makers

Huawei buys around $67 billion of components every year, including about $11 billion from U.S. suppliers. The company is a key purchaser of chips and a few other components from big U.S. suppliers like Qualcomm QCOM, Intel INTC and Micron Technology, Inc. MU. Notably, memory chip companies like Micron Technology derive about 13% of revenues from Huawei. Moreover, Qorvo, Inc. QRVO and Skyworks Solutions, Inc. SWKS make about 10% of their revenues from Huawei.

What to Expect?

The Trump administration has not approved any license requests allowing sales to Huawei. Per source, several license requests have been studied by agencies like the Department of State and Department of Defense. Moreover, with sudden twists in the ongoing Sino-US trade war, it is becoming increasingly difficult to predict the fate of these suppliers in the near term. However, some analysts expect certain license requests to be approved if the trade negotiation meeting goes well between the United States and China in September.

Semiconductor ETFs in Focus

Against this backdrop, let’s take a look at some of the semiconductor ETFs facing the trade war heat like the iShares PHLX Semiconductor ETF SOXX, VanEck Vectors Semiconductor ETF SMH, Direxion Daily Semiconductors Bull 3x Shares SOXL and ProShares Ultra Semiconductors USD.

SOXX

This ETF offers exposure to 31 U.S. companies that design, manufacture and distribute semiconductors by tracking the PHLX SOX Semiconductor Sector Index. The fund has amassed $1.58 billion in its asset base and charges a fee of 46 bps a year. It has a Zacks ETF Rank of 2 (Buy) with a High risk outlook (read: Trade War Gets Uglier: Here Are the ETF Winners & Losers).

SMH

This ETF has AUM of $1.27 billion. The fund provides exposure to 25 global securities by tracking the MVIS US Listed Semiconductor 25 Index. The fund charges an expense ratio of 0.35%. It has a Zacks ETF Rank #2 with a High-risk outlook (read: Beaten-Down, Top-Ranked Tech ETFs to Buy Now).

SOXL

This ETF targets the semiconductor corner of the technology sector with 3x leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $651.5 million in its asset base while charging 99 bps in fees per year. It has a High risk outlook (read: 9 Best-Performing Leveraged ETFs of 1H19).

USD

This product seeks two times the daily performance of the Dow Jones U.S. Semiconductors Index, charging investors 95 bps in annual fees. It has accumulated $55.9 million in its asset base and has a High-risk outlook (read: Trump Bans More Chinese Tech Companies: ETFs in Focus).

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