As if the coronavirus wasn’t enough to worry about, now tensions with China are ratcheting up again.
Trade tensions moved back into the spotlight last Friday after the Trump administration moved to block shipments of semiconductors to Chinese telecom giant Huawei Technologies from global chipmakers, with the Commerce Department saying that it was amending an export rule to “narrowly and strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology” companies.
The editor-in-chief of Chinese state-run news site Global Times, Hu Xijin, tweeted in reaction to the news that China will activate its “unreliable entity list” and “restrict or investigate” U.S. companies including Apple (NASDAQ: AAPL), Cisco Systems (NASDAQ: CSCO), and Qualcomm (NASDAQ: QCOM), and suspend the purchase of Boeing (NYSE: BA) airplanes if the U.S. takes any further action to block supply to Huawei.
Then this week, President Donald Trump stepped up his attacks on China as cases of the deadly virus rise to more than 1.57 million in the U.S., first threatening to permanently cut off funding to the World Health Organization for being a puppet of China, and then by suggesting that President Xi Jinping is behind a “disinformation and propaganda attack on the United States and Europe” relating to the coronavirus.
“It all comes from the top,” Trump tweeted, adding that China is “trying desperately to deflect the pain and carnage that their country spread throughout the world.”
And what’s more, the Senate on Wednesday passed a bill that could force Chinese companies to give up their listings on American stock exchanges, and while a vote hasn’t yet been scheduled on the bill in the House of Representatives, it’s widely expected to pass there as well given the widespread mistrust of China on Capitol Hill by both parties.
“It’s very clear the Trump administration means business and the hardliners seem to be viewing the pandemic as an opportunity to get even tougher on China than was the case before,” said Eswar Prasad, a professor at Cornell University and former head at the International Monetary Fund’s China division. “China has been trying very hard to corral the discussion in international policy circles around to the view that it has been the adult in the room trying to make sure that the pandemic’s effects can be contained, and that the right sort of approach can be taken towards addressing the pandemic.”
The increasingly hostile back-and-forth between the world’s two largest economies hit chip stocks particularly hard when the Huawei news broke as investors feared the group would be used as a weapon in a reignited trade war.
But Moor Insights & Strategy president Patrick Moorhead says investors shouldn’t worry too much.
“This Huawei spat, China spat – it’s just another episode in this ongoing trade and IP [conflict],” Moorhead said. “I wouldn’t look too closely. I mean this is, what, the 12th version of this of these bilateral spats? And the fact is, both countries need each other.”
While U.S.-based chipmakers generate a chunk of their revenues from China, Moorhead argues that investors should view any weakness in the group as a “buying opportunity.”
“I don’t see any of this sticking, or having long-term indicators given the symbiotic relationship that we have with China,” Moorhead said.
In the current environment, the strategist is particularly bullish on Qualcomm and Nvidia (NASDAQ: NVDA).
“Qualcomm gets credit for intellectual property for every smartphone that ships regardless of if it’s going into China, and there’s only a few handful of Qualcomm chips even going into Huawei gear,” Moorhead said.
Canaccord Genuity analyst Michael Walkley likes Qualcomm as well, recently issuing a $102 price target for the stock, indicating nearly 31% upside from the current price.
“Despite the near-term uncertain smartphone supply-and-demand environment, Qualcomm is well positioned to benefit from the long-term 5G investment cycle and anticipate recovering earnings in 2021 as 5G smartphones ramp, Apple reenters the model for QCT [a business segment] shipments, and global demand for smartphones improves,” Walkley wrote in a note.
The analyst sees 5G handset volumes between 175 million and 225 million in 2020, which combined with other segments translates to about $20.25 billion in sales for Qualcomm.
As for Nvidia, the gaming and data center chipmaker delivered an earnings beat Thursday, reporting its data center sales topped $1 billion for the first time last quarter.
“Cloud is a $100 billion market segment of IT today, growing at 40% into a $1 trillion opportunity,” said Nvidia founder and CEO, Jensen Huang, on a conference call. “Cloud computing is the single largest IT industry transformation that we have ever seen. The two forces that are really driving our data center business are AI and Cloud computing. We’re perfectly positioned to benefit from these two powerful forces.”
Moorhead said Nvidia’s fiscal first quarter results were “phenomenal” given the pandemic.
“The A100 data center training/inference product appears to be off on a rocket ship start, a very good sign,” Moorhead said. “Gaming and workstation growth are directly tied to competitive products and the need to work, govern and school from home.”