The United States government continues to tighten sanctions that are aimed at blocking China from accessing the latest U.S. technology.
Yet, the biggest American tech companies still heavily rely on China's technology imports and the Chinese market. In fact, despite five years of "decoupling," this reliance has barely changed, and in some cases grown.
Does that make these companies bad investments or are they still a great place to put your money?
Let's take a dive into the data.
Still Coupled to China
It's difficult to say whether China depends on U.S. technology more than U.S. technology companies rely on the Chinese market and supply chain.
Data from the QUICK-FactSet database revealed that 17 of the top 100 global companies in sales in China in the most recent fiscal year were U.S. tech-related companies. QUICK-FactSet estimates its numbers from annual reports and other filings and then uses an "estimation algorithm based on gross domestic product weighting and accounting logic."
According to QUICK-FactSet, dependence on China – as measured by the portion of yearly sales – increased or remained nearly unchanged since 2018 for many top tech firms.
This is especially true for companies in the semiconductor sector, which have been specifically targeted by the U.S. government. They've seen little change in the portion of their revenue generated in China. In fact, eight of the companies most dependent on China for sales were in the semiconductor sector.
Here are five major U.S. semiconductor companies and what percentage of their 2022 fiscal year revenues came from China: Qualcomm (QCOM) – 62.4%, Texas Instruments (TXN) – 48.2%, Broadcom (AVGO) – 34.3%, Applied Materials (AMAT) – 27.6%, Intel (INTC) – 26.6%.
Revenue Drop
After the U.S., last October, announced it would be tightening regulations on the export of cutting-edge semiconductor technology, Applied Materials predicted the move could cut its sales by up to $2.5 billion for the fiscal year through this coming October. The amount is equal to 10% of the company's sales for the fiscal year through last October.
According to Applied Materials' results for the quarter that ended April 30, sales to China plummeted to $1.4 billion, down 34% from a year earlier. China's share of the company's total sales, meanwhile, decreased significantly, to 21% from 34% for the year-before quarter.
Another chip equipment company, Lam Research (LRCX), expects annual sales in 2023 to fall by $2 billion to $2.5 billion due to U.S. restrictions.
Lam Research's China revenue was down 34% to $839 million year-on-year for the quarter that ended March 26. The sharp decline in China business "was largely attributed to the U.S. government sales restrictions for certain Chinese domestic customers," said Douglas Bettinger, the company's CFO.
And Qualcomm said in its annual report that "a significant portion of our business is concentrated in China, and the risks of such concentration are exacerbated by U.S./China trade and national security tensions."
Chip Stocks POWR Ratings
With the U.S.-China technology confrontation not ending anytime soon, what happens to these stocks?
A useful screen is our POWR Ratings, which look at a host of factors when evaluating a stock.
Not surprisingly, Qualcomm has C Neutral rating as does Texas Instruments, Lam Research and troubled Intel. I would not consider investing in these stocks.
However, Broadcom has a B Buy POWR Rating, along with Applied Materials. These are the two chip stocks to consider buying, despite the U.S./China semiconductor dust-up.
Broadcom is among the biggest potential winners from an artificial intelligence (AI) infrastructure boom, driven by its networking/switcher and ASIC (application-specific integrated circuit) businesses. I also think the company's visibility and demand prospects are better than ever, following the Apple chip supply agreement extension (20% of sales).
With regard to Applied Materials, I believe that Wall Street consensus estimates for the 2024 fiscal year are too low. Demand for its chip tools in etch and deposition will be driven by foundry/logic technology transitions. The company’s services business should benefit from a growing installed base. This exposure to recurring revenue will drive multiple expansion of its stock.
Broadcom and Applied Materials can be bought in the $875 to $925 and $140 to $160 range, respectively.
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AVGO shares were trading at $905.59 per share on Wednesday morning, down $14.41 (-1.57%). Year-to-date, AVGO has gained 64.00%, versus a 18.96% rise in the benchmark S&P 500 index during the same period.
About the Author: Tony Daltorio
Tony is a seasoned veteran of nearly all aspects of investing. From running his own advisory services to developing education materials to working with investors directly to help them achieve their long-term financial goals.
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