Nvidia Corp. (NVDA) , a stalwart of the semiconductor sector, is sliding as hopes of a trade war armistice have evaporated at the hands -- or, more specifically, fingers -- of President Donald Trump.
Shares of the Santa Clara, California-based semiconductor company were down around 4% in trading before Monday's open as concerns about the company's supply chain and the nearly 25% of revenue generated from China come into play.
Trump tweeted Sunday that tariffs on $200 billion of China-made goods would rise from 10% to 25% by the end of this week, and added that a similar levy on another $325 billion could be placed on China imports "shortly." Trump characterized the trade talks with China, which were renewed with much fanfare in early December, as moving too slowly.
For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday. 325 Billions Dollars....
— Donald J. Trump (@realDonaldTrump) May 5, 2019
....of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!
— Donald J. Trump (@realDonaldTrump) May 5, 2019
The tweets have unsettled the semiconductor sector in general, as similarly Sino-focused chip stocks such as Advanced Micro Devices Inc. (AMD) , Intel Corp. (INTC) , Micron Technology Inc. (MU) and Skyworks Solutions Inc. (SWKS) are falling by comparable percentages.
The slide in each stock threatens to cut into the nearly 40% run the (SOXX) semiconductor index has marked so far in 2019 on hopes of a trade deal and memory-inventory correction.
Analysts tried to put the latest Trump threat in perspective.
"We believe the long-term secular drivers for the industry remain intact, though a recovery might be more gradual than initially hoped for and China trade remains uncertain," Cowen analyst Matt Ramsay said.
The potential tamp on growth presented by escalated trade tensions with China is particularly troublesome for Nvidia as the company hoped for a trade deal and return to normality in China in order to curb its disappointing datacenter outlook globally and lift its other sectors.
Munger says Sino-American trade war is "stupid on both sides"
— Kevin Curran (@KevinCurranRM) May 4, 2019
These trade tensions also could sting gaming growth for a company such as Nvidia, which relies heavily on GPU sales to boost profits.
"Deteriorating macroeconomic conditions, particularly in China, impacted consumer demand for NVIDIA gaming GPUs," CEO Jensen Huang said in a January pre-announcement that led to the stock plummeting at that time.
Art of the Deal?
The question that surrounds Trump's motivation for tweeting at this time is whether his tariff threat is merely part of his well-known "art of the deal."
Some have speculated that Trump is seizing on a severe pullback in Chinese stocks, which has led to the Shanghai index falling nearly 10% in the past week.
In addition, IHS Markit PMI data showed the China manufacturing economy slowing in April as its PMI reading fell to 50.2 for the month, down from 50.8 in March.
"Data indicated that subdued sales largely stemmed from weaker foreign demand, as new export business fell for the second time in the past three months" the report states.
It is possible that Trump is leveraging this pain in the Chinese economy to push for a more amenable deal for the U.S. The Shanghai index fell nearly 6% and the Shenzhen index fell over 7.5% in Monday's trading following Trump's tweets despite them being scrubbed from Chinese media.
"[The tweets] could be some sort of last-minute bludgeon, because the Chinese have ceased to play ball," Action Alerts PLUS portfolio manager Jim Cramer hypothesized. "But it seems like Trump is all over this as a way to prove that we simply don't need the Chinese -- because we are doing so well here, and they are doing so poorly there."
Academy Securities head of macro strategy Peter Tchir was inclined to agree.
"I think this may be another example where the president seems to like to "blow up" a deal at the 11th hour, primarily so he can personally ride to the rescue and negotiate 'even better' terms than had been on the table," he wrote on Monday morning. "If that's the case, then we should see some progress toward a final deal in the coming weeks (after an extension of the newly created tariff deadline)."
To Buy or Not to Buy
So, with the analysis of Trump's thought process in mind and the possibility of a big bluff on the table, the action boils down to one key question: Is it a buying opportunity for beaten-down stocks, especially in the semis?
If the threat to trade subsides, this could be a key "buy the dip" opportunity. If not, semiconductor stocks tied strongly to China could be problematic picks.
"Markets around the world sold off on this news, but the big question now is whether this is the start of a major turning point or just a bout of volatility that will resolve itself favorably," Real Money contributor James "Rev Shark" DePorre said on Monday morning. "I don't know the answer to that, but given the history of the trade negotiations, this sort of bad news tends to be followed by good news quite quickly."
It will take a strong stomach, but for those betting that Trump is simply pressing his hand to accelerate a deal the president's power play could be more of a blessing than a curse for tech investors looking to seize on a pullback in the red-hot sector.
