Chip stocks have been in free fall following reports that semiconductor makers were cutting ties with Huawei following the Trump administration’s blacklisting of the Chinese telecom giant.
As Bloomberg reported last Sunday, chip makers including Intel (NASDAQ: INTC), Qualcomm (NASDAQ: QCOM), Xilinx (NASDAQ: XLNX), and Broadcom (NASDAQ: AVGO) have already told employees that they will stop supplying Huawei for the foreseeable future.
Google-parent Alphabet (NASDAQ: GOOGL, GOOG) was also set to immediately cut off the supply of hardware and some software services to Huawei, though it said on Tuesday that it would work with the company over the next 90 days following the Commerce Department temporarily easing some trade restrictions.
The blacklisting of Huawei came on the heels of President Trump raising tariffs on $200 billion worth of Chinese goods from 10% to 25% seemingly in an effort to put pressure on China in the ongoing trade negotiations between the two countries. China has announced plans to raise tariffs on $60 billion of U.S. goods. These tactics have ratcheted up tensions in a trade fight that has roiled financial markets and been a drag on the global economy.
“The problem is that the China trade issue is spreading; it’s no longer just a trade deal. It’s now Google cutting off Huawei and Qualcomm, Intel telling their employees they’re not going to sell to the company until further notice,” said Scott Nations, chief investment officer at NationsShares. “So I think the market is afraid that President Trump has so many balls in the air when it comes to what’s going on geopolitically that one of them is going to drop.”
Chip stocks have been some of the hardest hit in the trade war, and the VanEck Vectors Semiconductor ETF—which tracks the semiconductor industry’s largest companies—has fallen nearly 7% since the ban on Huawei was announced.
But as chip stocks tumble lower, one expert says now is the time for investors to consider buying shares of three top chip makers.
Huawei is the world’s largest maker of networking equipment, and RBC Capital’s Mitch Steves says that companies with high “smartphone exposure,” or those relying heavily on the growth that will come from 5G—such as Analog Devices (NASDAQ: ADI) or Skyworks Solutions (NASDAQ: SWKS)—will be the hardest hit by the Trump administration’s crackdown on working with Huawei.
Instead, Steves says investors should “hide in high-tech stocks” like Synopsys (NASDAQ: SNPS), Advanced Micro Devices (NASDAQ: AMD), and Nvidia (NASDAQ: NVDA) because they are better insulated from the Huawei drama due to their investments in artificial intelligence (AI) and deep learning.
“You cannot do AI, you cannot do deep learning, you cannot do any high tech without those three companies,” Steves told CNBC. “At the end of the day, if this really gets pushed to the end of the road, you’re going to look at U.S. semiconductor high-tech stocks being better.”
So far this year, Synopsys is up 38.9%, AMD is up 42.8%, and Nvidia is up 10.35%.
Analysts see upside ahead for all three, with RBC rating SNPS a Top Pick last month and setting a price target 15.4% higher than the current price, and issued an Outperform rating for NVDA last week with a price target 35.8% higher than Thursday’s closing price. Wells Fargo rates AMD an Outperform and their price target indicates possible upside of 44% over the next twelve months.