The trade war between the U.S. and China is escalating into a full-blown tech war as the Trump administration tries to throttle sales of U.S. technologies to Chinese companies with a trade blacklist. This means that U.S. companies now need the government’s permission to sell products to certain major Chinese companies like Huawei.
That move could cause collateral damage to any chipmaker that generates significant sales from China. Let’s examine three chip stocks that are heavily exposed to those escalating tensions Micron (NASDAQ:MU), Western Digital (NASDAQ:WDC), and Ambarella (NASDAQ:AMBA).
Micron is the world’s third-largest manufacturer of DRAM and NAND memory chips. DRAM and NAND prices peaked last year due to an oversupply of chips and soft demand from enterprise customers and device makers, and aren’t expected to rebound until late 2020.
Micron generates nearly all its revenue from DRAM and NAND chips, so it was a better “pure play” on the market than diversified peers like Samsung as prices rose. However, the cyclical downturn is now punishing Micron more than its peers. Analysts expect Micron’s revenue and earnings to plunge 23% and 47%, respectively, this year.
The trade war is exacerbating the pain, since Micron generated 57% of its sales from China last year. It recently halted chip shipments to Huawei in response to the Trump administration having blacklisted the Chinese tech giant, and that move will hurt — Huawei’s orders accounted for 13% of Micron’s total sales in the first half of 2019.
To make matters worse, Chinese chipmakers recently unveiled their first domestically designed DRAM and NAND chips to curb the country’s dependence on American tech. These chips won’t be mass-produced to match Micron or Samsung’s capacities yet, but they could drive down memory prices over the long term. All these factors make Micron a tough stock to own during the trade war, even if it seems dirt cheap at less than eight times forward earnings.
Western Digital is the world’s largest maker of platter-based HDDs (hard-disk drives), the fourth-largest maker of NAND chips, and the second-largest maker of NAND-based SSDs (solid-state drives). Its HDD sales have been sliding due to sluggish enterprise demand, weak PC sales, and competition from SSDs, while sales of its flash memory chips and SSDs were crippled by…
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