The tech stock exodus from Russia won't hit giants like Apple, Alphabet and Microsoft hard in the wallet. But tension in China is a different story.
Pulling the plug on business in Russia as the war in Ukraine escalates is a "no-brainer strategic decision for any exec who has a moral compass," said Wedbush analyst Daniel Ives. It also helps that tech sales in Russia amount to little more than a "rounding error" on their balance sheets, he said.
But tensions in China balance on a pendulum. China is closely watching the war in Ukraine while it evaluates its strategy toward Taiwan. Donald Trump recently said he expects China to invade the small island sooner rather than later. That would spell bad news for tech stocks. While Russia is the "salt on the bread" before dinner, China is the "meat and potatoes" of the tech sector, Ives said.
"The geopolitical landscape makes it very nerve-wracking," he told Investor's Business Daily. "But I also believe China has a much more strategic thought-out view when compared to the heartbreaking situation we're seeing in Ukraine and the unthinkable things Russia has done."
Tech Stocks: A Big Impact From China
It's hard to overstate China's impact on and ties to the Western tech sector.
In a recent analysis, IBD found nearly 15 major companies in the S&P 500, including tech stocks like Texas Instruments, Applied Materials and Tesla report more than a quarter of their sales come from China.
To put things in perspective: Last year, Russia and Ukraine spent a combined $56.5 billion on all information and communications technologies products, according to a recent IDC analysis. That accounts for just 1% of worldwide spending on all tech products.
Greater China spent $68.4 billion on just Apple products alone. That brought in close to 19% of the company's products for the year. Growth from China also outperformed every other geography, soaring nearly 70% year over year. Apple doesn't break out sales from Russia.
"Russia is breadcrumbs for tech companies," Wedbush's Ives said. "China is the heart and lungs of the technology industry globally. It's a lot easier to pull the plug on Russia because the ripple effect is very contained for tech companies."
Liana Semchuk, a Eurasia intelligence analyst at risk analytics firm Sibylline, says the iPhone is the third-best-selling phone in Russia. Yet, Russia represents just a fraction of Apple's global sales.
"Nevertheless, the move is powerful in that it adds to the growing number of other corporate giants that are engaging in 'self-sanctioning' and breaking commercial ties with Russia even before being mandated by various governmental sanctions," she said in an email to IBD.
China, U.S. Tensions Remain High
Tensions between the U.S. and China over Taiwan are a different matter entirely, experts say. But that doesn't mean tech stocks wouldn't embrace a similar retreat if China invaded the nearby island.
Today, many investors seek stocks that back political and social issues they care about. For example, a slew of tech stocks like Cisco Systems, DocuSign and IBM voiced support for the Black Lives Matter movement in 2020.
"In many situations, the company wants to take a position and make a statement," Andrea Siviero, associate research director for IDC's European Customer Insights and Analysis group, told IBD. "They have their own opinion and are free to show that."
Siviero declined to comment on the potential escalation between China and Taiwan.
China's president, Xi Jinping, is likely watching the financial "annihilation" in Russia with interest, says Eric Schiffer, chairman of private equity firm The Patriarch Organization. Tech stocks have abandoned the country in droves and countries have imposed severe economic sanctions, including a ban from the international payment system known as Swift.
Sibylline's Semchuk says the combined impact of companies exiting Russia and international sanctions has some analysts predicting Russia's gross domestic product will shrink by 11%. China will see that "draconian and powerful" impact before making a decision on Taiwan, Schiffer said.
Would Tech Stocks Exit China?
Still, experts IBD interviewed don't expect China to invade Taiwan.
There are stark differences between Russia-Ukraine and China-Taiwan. China isn't militarily engaged in Taiwan. That differs from the Moscow-backed separatist movement in Eastern Ukraine earlier this year, says Guo Yu, lead analyst for Asia-Pacific for Sibylline. Taiwan is also a U.S. ally and a key player in the semiconductor/electronics sector, he said in an email.
But in the case of an armed conflict, Western tech companies would likely exit Taiwan's conflict zone.
"The likely overwhelming international condemnation of China could force many multinationals to cut ties with the country," Yu said. "The conflict would also inflict enormous damages to China's economy and market, resulting in a very hostile business environment."
Schiffer offered a similar view.
"If China invaded Taiwan, you'd see a similar exodus, of course," he said. "Taiwan is an alliance partner with the United States, it has core intellectual property and it represents freedom in that region."
But could tech stocks afford to abandon business in China?
"Yes," he said. "Would it be a big hit to earnings? Absolutely. Most would feel, I think, a patriotic call. However, we're not talking about those risks being rationally realistic in the short run."
Shares Have Toppled This Year
Still, tech stocks have compressed amid the war in Ukraine and the world is closely watching China.
IBD's Telecommunications-Consumer Products industry group has fallen 12.5% this year. Those tech stocks, which include FAANG leader Apple, were on their fourth day in the red Tuesday. The Internet-Content industry group, led by Alphabet, has fallen 16% this year. Google just suspended all advertising in Russia, citing the "extraordinary circumstances."
So, even if tech stock investors are applauding companies' decisions to pull business from Russia, they also aren't piling into the stocks right now.
Schiffer says they'll come back. In the meantime, the exit from Russia will, undoubtedly, have a small impact on sales.
"But nothing compared to the brutal backlash that they would face from consumers" had they continued operating in Russia, he said. "It would be a bad move because of the misalignment in values, especially for American-focused companies."
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
