Why Semiconductor Shares Are Rallying After Micron's Latest Move

Maybe the trade war isn’t as bad as investors thought.

Nicholas Rossolillo
Nicholas Rossolillo
Jun 26, 2019 at 10:22PM
Technology and Telecom

Micron Technologies (NASDAQ:MU) thinks it has cut through the Gordian knot that is the trade war -- sort of.

It's actually more of a workaround. According to CEO Sanjay Mehrota on the company's fiscal 2019 third-quarter earnings call, Micron has begun selling some products to Huawei again. Mehrota explained:

As you know, effective May 16, the U.S. Commerce Department's Bureau of Industry and Security, or BIS, added Huawei and 68 of its non-U.S. affiliates to the BIS entity list. To ensure compliance, Micron immediately suspended shipments to Huawei and [began] a review of Micron products sold to Huawei to determine whether they are subject to the imposed restrictions. Through this review, we determined that we could lawfully resume shipping a subset of current products because they are not subject to export administration regulations and entity list restrictions. We have started shipping some orders of those products to Huawei in the last two weeks. 

CFO David Zinsner added that Micron has mitigated 90% of the impact from tariffs enacted over the course of the U.S.-China trade war and that the extra tax has had a minimal impact on profit margins. The chipmaker admitted that uncertainty remains, that it can't resume all shipments of product to Huawei, and that there's no guarantee there won't be more trade bans in the future. Nevertheless, the not-as-bad-as-expected bad news signaled relief for some of Micron's semiconductor peers.

Pictures of common everyday objects displayed in honeycomb cells, signifying an embedded chip and internet connection.

Image source: Getty Images.

Why care at all?

The semiconductor industry has been especially affected by the trade war. Not only is the world's most populous country a big consumer of technology, but a significant portion of the manufacturing process takes place there as well. The worry has been that higher taxes could dampen demand.

Then the crackdown on Huawei came. Huawei is a massive manufacturer of tech equipment, infrastructure, and consumer hardware, and it accounts for a significant portion of sales for many U.S. tech companies. Micron, for example, made 13% of its revenue from Huawei during its fiscal 2019 second quarter, before the ban went in place.

It's a similar story for other names in the sector. Connectivity chip maker Skyworks Solutions (NASDAQ: SWKS) has been beaten up lately because 12% of its sales were to Huawei. Worry also mounted that Skyworks' new 5G network products would struggle, as Huawei is a primary developer of the new mobile network technology and 5G infrastructure. The list of collateral damage goes on, including Broadcom (NASDAQ: AVGO), Xilinx (NASDAQ: XLNX), and others.

Micron's breakthrough, then, was good news for the sector. Optimism resurfaced that other names could soon find a reprieve. Chip stocks were up more than 3% the day after Micron's report, as measured by the iShares PHLX Semiconductor ETF (NASDAQ:SOXX). The index has rallied 25% year to date, but it remains about 10% off its high-water mark.

SOXX Chart

Data source: YCharts.

Don't sweat the chatter

Trade wars, tariffs, and bans on Huawei aside, one fact remains: Semiconductors are the building blocks of all things technology. And with technology an increasingly important component of our lives around the globe, the trade war is really just a distraction from the long-term secular trend that is in place. 

In answering an analyst question specifically about 5G networks, Mehrota had an obvious but nonetheless important point investors should remember:

Keep in mind that in certain countries 5G [has] already started to be deployed, such as [South] Korea, and there are of course leading suppliers other than Huawei as well for 5G. So it remains to be seen how this deployment occurs over the course of [the] next few quarters, in particular here. 

Trade wars are disruptive, especially when they're between the world's two largest economies. But there are other places to do business, and there are other companies that aren't Huawei developing technology in need of chip solutions. Workarounds are possible. Whatever happens next, there's no need to panic if you have a horse in the semiconductor race.