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Why Shares of Keysight Technologies Tumbled on Monday

Lou Whiteman, The Motley Fool

What happened

Shares of Keysight Technologies (NYSE: KEYS) fell more than 9% on Monday after the telecom equipment manufacturer became the latest in its sector to get caught up in the ongoing dispute between China's Huawei Technologies and the U.S. government

So what

Makers of equipment that goes into fifth-generation, or 5G, wireless technology have been under pressure since last week following a decision by the federal government to designate Huawei as a company engaged in activities that are contrary to U.S. interests. The designation restricts Huawei from buying equipment or licensing technology from American companies.

A cargo crate with the U.S. flag painted on it crashes into a crate painted in the Chinese flag.

Image source: Getty Images.

Keysight is one of a handful of companies expected to profit from the emergence of 5G wireless technology, and relative to some of its peers it has little exposure to Huawei. But Baird analyst Richard Eastman on Monday downgraded the company to neutral from outperform and lowered his price target to $82 from $90 on the news.

Eastman says that while Huawei is a small direct customer of Keysight, the impact of the dispute could weigh on Keysight's growth potential. He said he does not expect the troubles to hurt results in the recently completed quarter, though Huawei and China are expected to be a key topic of the post-earnings outlook discussion.

Keysight provides network test equipment to telecom operators and other original equipment manufacturers (OEMs), allowing them to improve their time to market when rolling out 5G equipment.

Now what

Keysight shares were having a remarkable year before the Huawei headlines, with the stock up more than 45% year to date in late April. Even after Monday's decline, the stock is still up more than 20% year to date, 7 percentage points ahead of the S&P 500.

Given the promise of 5G and Keysight's important role in the development of the networks, it is tempting to look at Monday's decline as a buying opportunity. But until there is more clarity into how the U.S.-Huawei dispute will play out, and what it will mean for 5G network development, investors should proceed cautiously.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.