How Trump's Huawei Decision Could Shake Up Tech Stocks

Chinese tech giant Huawei Technologies Co. Ltd.'s temporary reprieve from U.S. export restrictions is set to expire August 19, and there is currently speculation about whether this grace period will be extended.

Multiple media outlets reported last week that the "temporary general license," which allows U.S. companies to sell Huawei supplies, will be extended for another 90 days. Despite these reports, on Sunday, President Trump said he doesn't want to do business with Huawei. "At this moment it looks much more like we're not going to do business," he said, according to Reuters. "I don't want to do business at all because it is a national security threat and I really believe that the media has covered it a little bit differently than that." 

He added that he doesn't know if his administration will issue a new suspension on the ban and that small parts of Huawei's business could be exempted from it, but that would be "very complicated."

David Kostin, chief U.S. equity strategist at Goldman Sachs, calls August 19 “a key date for equity investors,” with the possibility that a surge in stock market volatility may follow, MarketWatch reports.

“A further extension appears unlikely given the U.S. government announced that federal agencies are prohibited from doing business with Huawei,” Kostin says in a recent note to clients, per MarketWatch. “Huawei sales outside of China will face risk immediately after Aug 19,” he adds, also observing, “Retaliation by China appears possible should the Aug 19 deadline pass without another extension.”

Significance for Investors

Stephen Pavlick, a policy analyst at Renaissance Macro Research, also believes that Huawei is likely to remain a key target of the U.S. in its trade war with China. “[Huawei] is emblematic of China’s state-led industrial policy that U.S. intelligence officials say relies on intellectual property theft, forced technology transfers, cyber-espionage and discriminatory treatment of foreign investment,” he observed in a note to clients, per MarketWatch. “President Trump sees Huawei as a leverage point that might be more important to China than tariffs," Pavlick added.

Christopher Yoo, a professor of law, communication, and computer and information science at the University of Pennsylvania, says that “the Chinese government is widely thought to exercise considerable influence over Huawei,” as quoted by MarketWatch. The U.S. sees a national security threat in Huawei's potential use by China for surveillance or sabotage of critical telecom networks in the U.S. and its allies, especially given its leadership in manufacturing key components for cutting-edge 5G networks.

Huawei is the largest telecom equipment vendor, with 2018 sales of $43 billion to network providers, or carriers, and $50 billion in smartphones, Bank of America reports. Meanwhile, a large portion of Huawei's semiconductors and software are purchased from U.S. companies. "Should Huawei continue to be cut off, there will be disruption to its ability to sell equipment and to suppliers," the report observes.

If so, competitors to Huawei that BofA believes could gain market share include Cisco Systems Inc. (CSCO), Juniper Networks Inc. (JNPR), Nokia Corp. (NOK), and L.M. Ericsson (ERIC). Cybersecurity and global smartphone vendors, especially other Chinese vendors, also may benefit.

Huawei was the third-largest largest buyer of semiconductors worldwide, spending $21 billion in 2018, with about 50% to 55% sourced from the U.S., per BofA. This puts a number of U.S. suppliers at risk from a renewed ban, including Qualcomm Inc. (QCOM), Xilinx Inc. (XLNX), Intel Corp. (INTC), Skyworks Solutions Inc. (SWKS), Qorvo Inc. (QRVO), Analog Devices Inc. (ADI), and Texas Instruments Inc. (TXN). The report estimates that aggregate sales by U.S. chipmakers may fall by about $6 billion annually.

Data storage device maker Western Digital Corp. (WDC) and connector maker Amphenol Corp. (APH) also are at particular risk from a ban, BofA notes. Also, the Google division of Alphabet Inc. (GOOGL) would no longer be allowed to provide updates to its Android smartphone software, or tech support.

On the other hand, a stepped-up program by China to reduce its reliance on imported chips may be a boon for makers of semiconductor manufacturing equipment such as Applied Materials Inc. (AMAT), Lam Research Inc. (LRCX), KLA Corp, (KLAC), and ASML Holding NV (ASML). In 2018, China consumed $155 billion of chips, more than 90% of which were imported, per BofA.

Looking Ahead

“Looking forward,” David Kostin wrote, per MarketWatch, Goldman Sachs “believes a trade agreement between the U.S. and China will not be reached before the presidential election in November 2020.” According to BofA: "Near-term (2019) Huawei impact mostly mitigated, although uncertainties for 2020 and beyond remain high."