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Technology stocks are a casualty of the trade war, but analysts say there's a longer-term chance some companies might emerge stronger, depending on terms of any deal between the U.S. and China.
For now, no deal is in sight and no talks seem to be set. Tech stocks are reacting to the trade concerns and White House and Commerce Department actions against China telecom company Huawei that would bar it from buying U.S. components. Tech stocks bounced Tuesday, after the Commerce Department said it would grant some temporary exceptions to the export blacklist against Huawei.
The biggest tech casualties have been chipmakers, with the Philadelphia semiconductor index, SOX, down 13.5% this month. Other companies have also been hit, like Apple, which is off 8.8% for the month as investors worry it could be hurt by Chinese retaliation and negative sentiment among Chinese consumers.
The Commerce Department said it would grant a temporary license for U.S. exports to Huawei and dozens of its affiliates, giving some suppliers and customers a 90-day reprieve.
Analysts expect China to respond to the Huawei action by increasing its focus on building out its own semiconductor supply chain, but that is a longer-term solution. In the near term, there is concern China will find ways to retaliate against companies that operate in China.
"Part of what this is all about is trying to keep our intellectual property safe. It's not easy to say, 'I'm going to be a manufacturer of chips.' The process to build some of these things takes decades to get there," said Dan Niles, founding partner of AlphaOne Capital Partners. "If you can't steal it ... or if you can't force U.S. companies into a joint venture, it's much harder to get up the curve quickly."
Analysts note that some companies were hit harder than they deserved, but the chip group had been hitting highs, even with negative earnings outlooks just weeks ago. The VanEck Vectors Semiconductor ETF hit an all-time high on April 24. Since May 1, it was down 12.9% but is still up 16% for the year.
"We've said very consistently that we're negative on semiconductors. That hasn't changed," said Niles. Short term, companies would see an earnings hit if the U.S. sticks with its clamp-down on Huawei. Niles said investors have to assess whether the stocks should have been priced at such high levels in the first place.
"The way I explain it is you should be able to take some short-term pain for the longer-term gain it brings to the U.S.," said Niles.
"This is a good thing from a long-term perspective. ... China has been brilliant in all of this, for 20 years, they've gotten everything they wanted. They made our companies work with them in joint ventures. They made U.S. companies team up so they could learn from the U.S. companies. They've been masterful with this. The U.S. fell down on the job. We're trying to go from a position of weakness," he said.
Analysts also say the talks do not appear to be going well and intellectual property is an area that's difficult to tackle.
"I think it's going to be a long shot that you're going to fix all the problems with China in one trade deal," said Lori Calvasina, chief U.S. equities strategist at RBC. "Everybody agrees that the business community wants things to be better with China, but it just doesn't seem like we're heading in that direction at the moment. The goals are worthy. I don't know that we have a magic wand that's going to make all the problems go away."
Calvasina said software was also hit hard Monday, even though it is less exposed to trade issues. She said it appears investors were taking profits there, since it is an overcrowded space and high priced. Software was down 1.3% and tech hardware was off 2.9%, while semiconductors were down 3.9% Monday
"In the short term, you're [semiconductors are] going to have to go through some pain," Niles said. "Are they going to go out of business? Absolutely not. If this continues, will Huawei go out of business? Yes they will." The U.S. previously took similar action against Huawei rival ZTE, but later reversed it.
Wedbush tech analyst Dan Ives said he's been overweight technology and he sees the sharp decline in semiconductors as a buying opportunity. "In my opinion, the Street is baking in somewhere between a middle to worst case scenario with some of these names," he said. Ives said if there are signs a deal is coming when President Donald Trump and China President Xi Jinping attend the G-20 summit, that could create a buying opportunity.
"Right now, the bark is worse than the bite, and that's why we'd be a buyers of these names. On the semiconductor side, the ones that stick out continue to be ones that are exposed to 5G," Ives said.
B. Riley FBR analyst Craig Ellis pointed to 5G companies like Qorvo, Skyworks, Xilinx, Qualcomm, Broadcom and Analog Devices. But in a note he said Marvell had been more resilient last week because its customers include Nokia and Samsung, and not Huawei. But Marvell was down 3.9% Monday, as the whole group was sold.
Niles said he expects investors to be more discerning, viewing the Huawei-connected names differently.
Calvasina said the chip stocks ran up on optimism for a trade deal as a group during the months of negotiations.
"I think they deserve what they're getting," she said.
"The reality is either that the talks really did break down or they were not as advanced as we were led to believe. The reasons semis rallied so hard was expectations for a deal, she said. "I do think it makes sense to give back some of the gains."