Chip equipment makers led technology stocks lower Tuesday following reports that U.S. sanctions could spread to businesses like Semiconductor Manufacturing International Corp., China’s largest chip fabricator.
Shares of KLA Corp.
Lam Research Corp.
and Applied Materials Inc. AMAT all fell more than 6% as U.S. stock markets opened on Tuesday following Labor Day holiday weekend, while the PHLX Semiconductor Index SOX was down nearly 3%.
Over the weekend, reports surfaced that SMIC could be added to a U.S. “entity list” like telecom equipment maker Huawei back in May. On Monday, when U.S. markets were closed, SMIC
shares dropped more than 20% in Hong Kong trading.
Investors may be worrying that SMIC is just another one of many Chinese companies to get added to the list, given President Donald Trump’s recent bellicosity toward Chinese-owned apps TikTok and WeChat .
“Will the Trump Administration stop with only Huawei and SMIC?” speculated Evercore ISI analyst C.J. Muse in a Tuesday note. “Hard to say,” he said, warning that other chip makers in China could be next. Should the potential ban be limited to SMIC, then chip-related stocks have been oversold, Muse said.
Tech stocks have been getting battered since last week, when the tech sector gave up in two sessions at least half of seven week’s worth of gains from a strong earnings season .
Morgan Stanley analyst Joseph Moore said adding SMIC to the list “certainly would be a negative impact to our semiconductor capital equipment coverage”. Moore noted that SMIC had plans of spending $6.7 billion in capital equipment this year alone.
“The bigger issue is that the China risk factor for semiconductor capital equipment continues to grow, as U.S. Commerce Department actions continue to impact new areas,” Moore said.
Susquehanna Financial analyst Mehdi Hosseini took a much less fearful view of the development, remarking that “policy has also proven a double edged sword as efforts of the past few years in isolating China have not really proven a winning strategy”.
Hosseini said “with secular trends suggesting a bright future for chip consumption and thus [semiconductor capital equipment], especially as more of the demand shifts to cloud/commercial end markets, the pull backs caused by such headline risks can also offer a buying opportunity, in our view.