Chip stocks brush off trade war as investors bet on 5G

Despite trade tensions with China and weak demand for chips, semiconductor stocks have rallied this year as investors look to the next generation of network technology known as 5G.

The VanEck Vectors Semiconductor ETF, which tracks companies in the semiconductor sector, is up nearly 39% in 2019 and hit an all-time high in July, outpacing the S&P 500 and the Nasdaq Composite.

Semiconductor manufacturers, especially those that take in a significant portion of their revenue from China, have faced major headwinds this year such as trade tensions with the world’s second-largest economy and weak demand for chips. But, overall, investors are betting on a big payoff in 2020 when the 5G network begins to roll out and demand is expected to pick up, analysts say.

“What’s being priced into these stocks is a rebound next year,” said Logan Purk, an analyst for Edward D Jones & Co.

Semiconductor stocks, including those with a large exposure to China, such as Qualcomm, Broadcom and Micron, experienced a sector sell-off at the end of 2018 but rebounded in 2019. The 5G network, using wireless technology that provides a huge leap in speed and connectivity, will benefit companies, according to analysts.

Historically, Qualcomm — up about 38% in 2019 — has won big with new network roll outs, said Michael Walkley, senior equity analyst at Canaccord Genuity. He doesn’t expect 5G to be any different. Qualcomm sells to a lot of original equipment manufacturers in China that are waiting for their chips for next-generation phones, he said. While China is working on creating its own chips, experts say it’s years behind the U.S. in development.

“5G is a catalyst for Qualcomm,” he said.

Jun Zhang, managing director at Rosenblatt Securities has a buy rating on Qualcomm.

“As the industry upgrades from 4G to 5G that helps Qualcomm in winning some market shares,” he said. “The 5G cycle benefits Qualcomm.”

Broadcom — up about 13.5% in 2019 — stock has failed to keep pace with its competitors because its acquisition of CA Technologies last year confused the market, but it was a wise business-decision in the long run.

When it first bought the software and cloud computing company stock prices fell. But now the merger, which helped diversify the company away from chips and into software services, has given it more opportunities to capitalize on 5G, according to Purk.

“It helps Broadcom stand apart,” he said.

Micron — up about 60% in 2019 — has the potential to tap into 5G as well as devices will need more memory storage, said Vijay Rakesh, senior analyst at Mizuho Securities USA.

Retail investor Geoff Regan, who bought Micron about 18 months ago, isn’t too concerned about its exposure to China.

“There’s a lot of buzzwords that surround their growth narrative like AI and the cloud,” said the 26-year-old who works in banking as a management trainee.. “They have some good prospects.”

Weak demand for chips will continue to weigh on the sector through the end of the year, according to analysts. Trade talks with China impact semiconductor’s short-term volatility as well.

“They certainly trade around marked changes in Trump’s tariff policy,” said Christopher Rolland, senior analyst for Susquehanna Financial Group. “If trade negotiations have a bad day, you’re going to see stocks down.”

Efforts between the U.S. and China to ease trade tensions over the past couple of weeks have benefited the sector. Analysts also said that growth would be substantially better with trade tensions out of the equation.

“That’s by far the biggest overhang when it comes to semiconductors stocks,” Purk said.

Another headwind for semiconductors, a cyclical sector that ebbs and flows with the economy, is the slowdown of global economic growth. But analysts say the sector felt most of that hit late last year.

“They started feeling the pain a lot earlier because they were directly in the crosshairs of the tariffs,” Rakesh said.

Rolland said 5G exposure has the potential to insulate semiconductors in a recession.

“Even though we have things like global ISM numbers rolling over and we have macro worries, this is a secular story we can play that gets us away from the broader picture,” he said.

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