Qualcomm (QCOM) is feeling the impact of the trade war, marking one of the hardest-hit stocks in the trade war's recent twists.
Shares of the San Diego-based semiconductor company dropped over 4% in pre-market hours, fomenting downward momentum from the nearly 10% slide already realized since President Trump tweeted that negotiations with the Chinese to settle trade disputes fell apart.
The company, which is seen as a leader in 5G chips, is down recently following the Commerce Department's decision to shun Chinese smartphone giant Huawei.
"The president knows that Huawei has the lead in 5G but that lead will be effectively thwarted because you need those [semiconductor] companies' components to make it all work," Jim Cramer wrote in his column on Thursday.
Evaluating Exposure
The impact, while politically justifiable through this lens, has reverberated throughout the semiconductor space.
"We think that the U.S. government action against Huawei creates risk for chip companies that might have high exposure to Huawei," Nomura analyst David Wong wrote in a note on Sunday evening.
Qualcomm is clearly one such company, given it draws nearly two thirds of its revenues from China -- and CEO Steve Mollenkopf noted Huawei was picking up market share in the important region in a conference call on May 1. Along with Xiaomi (XIACF) , the Chinese smartphone maker relationships are key opportunities for Qualcomm.
Catalysts Quelled
Additionally, the market is likely more focused on Qualcomm's relationship with Huawei, given its ongoing patent dispute that was seen as the next key catalyst for the company after its recent resolution with Apple (AAPL) following a year-long court battle.
Morgan Stanley analyst James Faucette pointed to Huawei as the key remaining regulatory and legal risk holding shares back, in a note to clients in late April.
"[Huawei] is really the only growing handset OEM, and in 2018 likely accounted for more than 100% of industry growth (it grew but the rest of the industry shrank slightly) and 2019 looks like it will be similar," Faucette explained. "By virtue of using primarily chipsets from its wholly-owned subsidiary HiSilicon, and not paying full royalties, it is hurting Qualcomm's ability to show as much immediate benefit as some might have imagined."
Company management touched upon the ongoing negotiations with Huawei that may be able to smooth the road ahead for the stock as the 5G shift comes into view, noting that a settlement with Apple strengthens its position.
"In terms of the negotiations with Huawei, they're ongoing," Qualcomm executive vice president Alex Rogers told analysts. "We feel that the Apple resolution enhances our ability to resolve issues with Huawei. So we think that's a good thing."
Go Behind the Label: Inside the History of Qualcomm
For the time being, the company only holds an interim agreement for a $150 million payment, far below what could be expected with an Apple-like agreement. The resolution to this dispute has certainly been pushed farther out of reach with the latest developments.
Slowing Growth, Supply Glut
The new restrictions also pose a question of supply and demand normalization as Bloomberg reports that Chinese telecoms companies have stockpiled chips in order to navigate the sanctions in the near term. The Chinese giant may also have European semiconductor companies to rely upon in the absence of U.S. suppliers like Qualcomm, while it continues to build out its own capabilities through its HiSilicon subsidiary.
More broadly, the semiconductor industry is highly tied to global GDP trends, according to a Deutsche Bank analysis, which a worsening relationship between the world's two largest economies would of course meaningfully impact.
"Should tariffs impact China/United States from a GDP standpoint, and given the historical sensitivity, we anticipate the impact to GDP from the trade disputes to be a meaningful risk to semis," Deutsche Bank analyst Ross Seymore said. "Those who have significant direct China customer exposure (serving large telecom/optical OEMs, China smartphones, etc.) or companies that service the more commoditized end of the semiconductor spectrum (memory, discretes, passives) could see a greater risk as Asia/European manufacturers are more seriously considered as alternatives."
Considering Qualcomm's aforementioned exposure to these segments, it should be little surprise that the market is directing its ire squarely at the San Diego-based semiconductor leader that the U.S. administration once called a "national treasure."
