It seems the entire market conversation revolves around one thing right now: tariffs.
The tech sector has been particularly susceptible to the prospect of losing access to China's cheap manufacturing facilities, as well as its customer base.
The entire Semiconductor Index (SOX) has been the victim of a month-long selloff, driven by fears that chip makers will lose a big piece of their sales to China. In Micron's (MU) case, drama has also mounted around a preliminary ban on the sale of some of its products in China.
Overall, it's unlikely that China will be able to implement policies that seriously damage US chip makers at this time.
Micron (MU) rose 2.6% after market close on Thursday. PHLX Semiconductor Sector (SOX) rose 2.7% on Thursday.
Look at what happened to Chinese phone maker ZTE (ZTCOF) when the US barred it from purchasing chips and other parts for their phone production. The company's manufacturing facilities came to a complete halt from a lack of necessary components. Even after lessening of the restrictions, the company is still facing a questionable fate.
This is a prime example of how Chinese tech producers cannot currently give up US chip makers in their supply chain. While equipment suppliers might take a hit in order to block China from increasing its own manufacturing abilities, I think the entire sector has become too important to the phone and television industry to truly suffer greatly.
The news that a Chinese court had issued a preliminary ban on the production and sale of some products from Micron's China-based subsidiaries has some concerned. Micron stated on Thursday that the products in question represented around 1% of its total sales, so this is definitely not the end of the world. It is also not clear how long this sales complication will last.
The issue is the result of a dispute with Taiwan rival United Microelectronics Corporation (UMC) over patent infringements. This is a major source of contention for the entire industry: everyone wants to gain control of intellectual property and subsequent sales. This "preliminary junction" doesn't appear to be permanent. Micron will likely appeal, and the standoff will continue. The important thing to remember here is that it's a small piece of Micron's overall business.
As other Real Money contributors pointed out, I agree that Micron remains a good investment.
The company has been doing well as of late. First quarter results included a 40% increase in revenues of $7.8 billion. Perhaps even more important was the 80% improve in gross income of $4.72 billion. All of this allowed for net income growth of 131% year over year to $3.82 billion. With a relatively stable share count, diluted earnings per share grew 121% to $3.10 per share.
It's hard to find that type of growth anywhere in the stock market for the value bargain price that Micron is offering currently. P/E ratios under 10 are always a welcome sight when a company is making this kind of money.
Yes, a large percentage of its revenues derives from China, but I don't see how China can hit too hard on the chip front since they don't currently have the capacity to make them on their own.
The conflict does beg the question about potential escalation of tensions if the Trump administration's trade dispute takes a turn for the worse. My current stance is no. The semiconductor business remains insulated for the time being.
It is rather convenient that this all went down one day before the newest rounds of tariffs are expected to be implemented. China talks a big game. Obviously, it is intent on at least putting up the appearance of being able to bite back at our trade moves.
That said, Chinese manufacturers of tech products are still heavily reliant on U.S.-produced chips for their goods. The country cannot afford as a whole to hamper its own companies' production capabilities just to make a point. In other words, they're not the United States.
Applied Materials (AMAT) is another name that has had a rough month of trading. The costs associated with the chip making industry have been rising. This is primarily linked to the ever increasing complexity of the technology.
Because of this, many of the actual chip company's outsource work to other companies that can bear the costs. Applied materials builds a lot of the equipment needed to make things like computer chips, and therefore stands in a nice spot as a supplier to all. What I fear here is the United States making a move to block China from gathering the equipment needed to make its own chips.
If you're trying to implement tariffs on China, while blocking them from building their own semiconductor industry to counter it, you're very likely to block the countries access to equipment makers like Applied Sciences. Because of this, I'm a little skeptical on this stock right now. Their business seems to be there in terms of selling equipment to others, but news of tariffs on their ability to do business in Asia could hurt the stock price. It's different than Micron in the sense that China wants to buy Micron's chips for their products. Applied Materials wants to sell China equipment needed to produce semiconductors. That's something that the Trump administration doesn't like. Therefore this could get a little more complicated.
Applied Materials is also pretty cheaply valued, and their association with providing equipment to producers in the United States will certainly keep it from collapsing, but the company does have Chinese exposure from an equipment supply side. That could face regulatory scrutiny in light of the attempt to block China from obtaining and producing comparable tech. That said, I think the company will still profit from relationships with Apple (AAPL), Micron, etc. It's sort of a catch 22. They're doing well, but losing growth opportunities in China could damper the long term outlook.
Another semiconductor equipment manufacturer, Lam Research (LRCX) is a stock to be careful with for an entirely separate reason from tariffs. The company has been projected by Evercore analysts to experience a possible 30% fallout in shipments in the coming months due to delays at Samsung Electronics Co. The issues regard new memory chips that the electronics company is working on.
Overall, Lam makes a lot of money. Once their shipment concerns subside, they have a great dividend of over 2.5%, and their position as an equipment supplier means that they'll have customers regardless of where the products are made. There is no way that China will be able to hold a full-scale tariff war in this sector, as they lack the manufacturing required to do it themselves. I see deals being made in which China eases their positions with the US, and these stocks subsequently rebound. If they don't, China faces the prospect of losing its position as a manufacturer of electronics.
The question around these stocks is whether you can take the heat. Whether you agree with the United States' current moves on trade or not, the fact remains that China's tech industry is extremely reliant on U.S. semiconductors. In fact, the country is so dependent that semiconductors are their number one import in regards to cost. That's not something you can shift in a matter of a few years, regardless of how badly you want to. Because of that, I think China will keep buying from us for quite some time.
Down the road, I think it would be wise to pay attention to how much investment and success China is able to accomplish in facilitating its own chip making industry. Until then, the talk seems like noise to me.