Stock investors concerned about China's slowdown got a taste of worse things to come with the double-digit stock drops by Nvidia Corp. (NVDA) and Caterpillar Inc. (CAT) this week. Goldman Sachs says says that the current earnings season is likely to claim even more blue chip victims as China's woes weigh on profits and stocks prices, including chipmakers Broadcom Ltd. (AVGO), Micron Technology Inc. (MU), Qualcomm Inc. (QCOM), Qorvo Inc. (QRVO) and Skyworks Solutions Inc. (SWKS), as well as gaming company Wynn Resorts Ltd. (WYNN). These six companies get more than 50% of their sales from the Greater China region. "Although our relative GDP and FX forecasts suggest an improving environment for international-facing stocks relative to domestic-facing stocks, risks are abundant," wrote Goldman Sachs in its latest U.S. Weekly Kickstart report.
6 Stocks At High Risk
(More Than 50% of Sales From China)
- Broadcom Inc.
- Micron Technology Inc.
- Qualcomm Inc.
- Qorvo Inc.
- Skyworks Solutions Inc.
- Wynn Resorts Ltd.
Source: Goldman Sachs
Global Tensions Cast Shadow Over Earnings
This earnings season has already shed light on how deteriorating economic conditions, particularly in the world’s second-largest economy, are causing numbers to come in lower than expected. Apple Inc. (AAPL) started the trend earlier this year when it lowered its top line forecast by 8%, attributing the weakness to a slowdown in China demand. Apple was expected to give more detail about China and other markets when it reports after the bell on Tuesday.
Until it's revolved, the trade conflict between the U.S. and China also will continue to aggravate the impact of China's slowdown on American companies. “In addition to the FX and economic growth risks, global tensions over trade policy and the economic relationship between US and China will play a key role in the future relative performance of the baskets,” said Goldman.
Micron Technology illustrate's the group's vulnerability. The $41 billion company generates 86% of its sales outside the U.S., making it particularly vulnerable to China weakness and new tariffs, per Goldman. Despite rallying in 2019, Micron stock is down 14% in the past 12 months. Softness in China has contributed to Micron's problems during a chip industry downturn characterized by inflated inventories and weaker pricing.
For stock investors, China’s economic deceleration serves as a lesson regarding the high risks that an industry -- in this case the chipmaking -- faces when it depends too much on one nation for sales and sourcing. This may lead vulnerable sectors such as semiconductors to diversify their businesses and drastically rethink their China strategy.