Last week, the U.S. Commerce Department added Huawei Technologies to its Entity List, saying, “The U.S. government has determined that there is reasonable cause to believe that Huawei has been involved in activities contrary to the national security or foreign policy interests of the United States.” This in effect bars the Chinese telecom equipment maker from doing business with U.S. companies, although the trade restriction was given a 90-day reprieve a few days later.
We are maintaining our fair value estimates for the U.S.- and Europe-based chipmakers we cover despite reports that leading U.S. technology and semiconductor companies, such as Google (GOOG)/(GOOGL), Qualcomm (QCOM), Broadcom (AVGO), Intel (INTC), Xilinx (XLNX), Qorvo (QRVO), and Analog Devices (ADI), have cut off supplying Huawei until further notice. Our valuations imply that the Huawei ban will be used as short-term leverage by the U.S. in ongoing negotiations with China involving tariffs and other trade negotiations. However, our models still assume that the ban won’t last in the long term, as it would be highly destructive to technology companies in both China and the U.S., given the complexity and interwoven nature of the tech supply chain. Our valuations don’t incorporate a long-term doomsday scenario where Huawei is driven out of business because of its inability to access U.S. components or a potential cold war response from China where U.S. companies might be cut off from China’s supply chain, which would likely cripple production of Apple (AAPL) iPhones and all types of enterprise IT equipment.
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Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.