Despite a long list of red flags, bulls at Bank of America Merrill Lynch say that semiconductor stocks are are poised to make sustained gains as prospects improve for a U.S.-China trade deal and as President Trump partially lifts the ban on U.S. companies doing business with Chinese telecom giant Huawei. "We continue to believe semis remain a under-invested sector, and positive trade news and expectations of easier comps [year-over-year comparisons] in Q419 and 2020 could improve investor sentiment," BAML writes in a recent report.
The report focuses heavily on whether U.S. chipmakers will benefit from renewed sales to Huawei, while also noting that the industry is beset by serious problems globally, including sluggish demand, high inventories and weakening growth in China.
BofAML says chipmakers that will see "an immediate benefit" from the easing of the Huawei ban include Broadcom Inc. (AVGO), Qorvo Inc. (QRVO), Skyworks Solutions Inc. (SWKS), Inphi Corp. (IPHI), Xilinx Inc. (XLNX), Marvell Technology Group Ltd. (MRVL), Analog Devices Inc. (ADI), and MACOM Technology Solutions Holdings Inc. (MTSI). Other chipmakers BofAML likes, for other reasons, are: NVIDIA Corp. (NVDA), Advanced Micro Devices Inc. (AMD), NXP Semiconductors NV (NXPI), plus Broadcom.
The table below summarizes the key developments regarding semiconductors.
- Semiconductor stocks got an initial boost from renewed U.S.-China trade talks.
- However, chipmakers' shares have retreated on Tuesday from Monday's highs.
- President Trump says he is willing to relax restrictions on sales to Huawei.
- High inventories and weak demand still beset chipmakers.
Significance For Investors
BofAML's report was issued on Sunday, and the Philadelphia Semiconductor Index (SOX) rose by 2.6% on Monday. However, it retreated by around 1% in early trading on Tuesday, a sign of underlying skepticism about a comprehensive, long-lasting trade deal.
Per BofAML, Huawei bought almost $11 billion of semiconductors from U.S. chipmakers in 2018. Inphi, Skyworks, and Qorvo have the highest exposure, with about 10% to 15% of their sales from Huawei. All three revised their guidance after the U.S. banned sales to Huawei, lowering their sales projections by up to 7%. Xilinx, Marvell, Analog Devices, and Broadcom have exposures of less than 10%, but all lowered their sales guidance by 4% to 8%.
"We note that status of Huawei restrictions still remains in flux, and it is possible the company's fate remains part of the ongoing US/China trade negotiations," BofAML warns. They offer three likely scenarios:
Scenario One: Huawei is fined for prior acts, but U.S. companies have complete freedom to sell to it going forward.
Scenario Two: The U.S. remains concerned about Huawei's national security implications. Thus, Huawei can buy smartphone chips from Skyworks and Qorvo, but not 5G chips from Broadcom, Xilinx, Marvell, and Inphi.
Scenario Three: Despite the "early lip service," Huawei's status remains stuck in extended trade negotiations.
“It remains unclear if anything has really changed as there are already mechanisms by which (uncontrolled) products can be sold to Huawei,” said Bernstein's Stacy Rasgon, per Barron's.
Skeptics warn that a U.S.-China trade deal is far from done, and Huawei remains a big bargaining chip. Meanwhile, China already has a longterm plan to upgrade its own semiconductor industry, and the trade spat is bound to lend more urgency to those efforts, The Wall Street Journal observes. The upshot is diminished future sales prospects for U.S. chipmakers.