Presidents Trump and Xi held their meeting at the G20 summit this past weekend, and came out smiling. While both governments are vague about details, their public tone has been upbeat. The conventional wisdom is that both leaders got part of what they wanted; Trump can claim success by continuing the current tariffs and getting China to resume purchasing US agricultural products, and Xi can point to the hold on further tariffs and resumption of US commercial ties to Huawei as wins. Both governments are pleased that trade negotiations will resume.
The news gave markets a shot in the arm. The S&P 500 hit another all-time high on July 1, closing at 2,964, and the Dow and Nasdaq showed near-record levels. Among the biggest winners, however, were the semiconductor companies. The chip industry generally, but American chip makers especially, had been hit hard by the trade tensions. Restrictions on American imports to Huawei, and the threat of additional tariffs on Chinese trade, put intense pressure on America’s chip industry. That pressure is now reduced, and the big names in American semiconductors are rising. Let’s dip into TipRanks’ database for the details.
Qualcomm, Inc. (QCOM)
Qualcomm’s stock got a 1.9% bump after the Trump-Xi meeting, closing on July 1 at $77.52. The company’s main relief was on the Huawei front; Qualcomm was one of several chipmakers that directly lobbied the White House to ease restrictions on the Chinese telecom company’s access to US-sourced components.
Maintaining trade links between American chip producers and Chinese markets is of major importance to Qualcomm. The company is exposed to China’s markets directly, through its links with Huawei, and indirectly, through its position in Apple’s supply chain. Both links are threatened by a US-China trade war, but as long as the countries talk and hold off on tit-for-tat tariffs, Qualcomm and its investors can breathe easier.
QCOM’s most recent analyst review comes from James Faucette of Morgan Stanley. Faucette points out that Qualcomm’s investors “[require] a bit more mettle given its history of political and legal risks, but at current levels the stock is still worth the noise.” His comments referred to the company’s recent legal battle with Apple (AAPL), but goes on to say that QCOM can see a positive impact from an uplift in Huawei. He estimates Qualcomm’s FY2021 EPS at a robust $6.80, and gives the stock a $95 price target. This suggests an upside of 22%.
Overall, QCOM shares have a ‘Moderate Buy’ from the analyst consensus, and an average price target of $85. With a share price of $77, this gives the stock a 10% upside potential.
Micron Technology, Inc. (MU)
Micron was another winner, posting a 3.9% gain in Monday’s trading. Micron had managed to maintain its shipments to Huawei despite the restrictions imposed on the Chinese company. With that trade now less vulnerable, MU can breathe easier. Trade with Huawei makes up some 13% of Micron’s revenue stream.
Easing trade tensions aren’t the only good news for MU, however. The company also posted a rosy Q3 report for FY19. Revenues were up, at $4.79 billion, and 2% above the forecast. EPS, reported at $1.05, was an impressive 33% above expectation. With a strong quarter behind it, and clearer trade with China ahead of it, it’s no wonder that Micron’s shares are rising.
Wall Street’s analysts are responding to the MU’s good news as you may expect, with positive ratings on the stock. Rajvindra Gill, five-star analyst from Needham, upgraded his stance on MU, moving it from ‘hold’ to ‘buy.’ His price target, $50, suggests a 24% upside to the stock.
JPMorgan’s Harlan Sur, writing just before the Trump-Xi meeting, also took an upbeat posture on Micron. Noting that the company was maintaining its links with Huawei, he added, “technology migrations and manufacturing ramps in DRAM and NAND, combined with a focus on higher value-add products, should be tailwinds to gross margins into next year.” Like Gill, Sur gave MU a $50 price target.
With buys, 6 holds, and 4 sells assigned in the past three month, MU shares get a ‘Moderate Buy’ from the analyst consensus. The stock is currently priced at $40.11, so the $42.29 average price target indicates a potential upside of 5.4%.
Broadcom, Inc. (AVGO)
Broadcom gained 4.3% after news of the successful trade meeting, making it the biggest winner among the major US chip companies. With a 5% sales exposure to Huawei, Broadcom faced a somewhat lower threat than its competitors, but the improvement in US-China relations still came as a relief. The company had predicted a $2 billion reduction in sales in 2019, had the Huawei ban remained in place.
Wall Street’s analysts were cautious in their reviews of AVGO shares before the trade talks thawed. Writing from Mizuho, Vijay Rakesh specifically noted “a broad-based slowdown with geopolitical tensions, the Huawei ban, and tariff concerns in lowering its fiscal 2019 sales guidance 8%.” Looking ahead, however, Rakesh saw potential for improvement, and said, “a resolution of geopolitical tensions and bans could drive a mean reversion in stronger demand and inventory build.” Tensions have eased; AVGO’s quick market gains are a clear indication that traders agree with the analyst on near-term possibilities for gains. Rakesh’s price target, $330, suggests that those gains will be on the order of 10%.
With a ‘Strong Buy’ from the analyst consensus, and a 3% average upside, Broadcom has both the best rating and the lowest potential of the stocks in this article, reflecting, perhaps, its lower-risk exposure to Huawei. Shares are priced at $300; the average price target is $308.
