Two-thirds of semiconductor manufacturers globally say they are likely to raise prices to pass along the added cost of tariffs to customers, according to a KPMG survey.
But a closer look at the numbers, coupled with efforts from many chip makers to mitigate trade war risks, shows that big chip players have put the trade war mostly behind them. With President Trump signing a phase one trade agreement with China Wednesday, semiconductor investors will have even more confidence tariffs won’t be much of a risk to their holdings anymore.
Semiconductor stocks have soared in the past year, as investors looked past a 2019 revenue and earnings declines owning to an oversupply of chips in late 2018. The Philadelphia Semiconductor Index SOX is up 56% in the past year, beating the S&P 500’s gain of 25.9%. Aiding the gains for chip stocks have been the ability to minimize the trade war’s negative impact and the upcoming 5G device cycle.
Tariffs on semiconductor products finished in China add a cost to U.S. chip makers who have to import the product from China into the U.S, forcing them to either accept a thinner gross margin or raise prices, hurting demand.
Still, the KPMG survey found that 67% of semiconductor companies expect to pass on the added cost from tariffs onto customers. The firm said 45% of companies surveyed were U.S.-based, with 32% of the companies having revenues of $1 billion or more. Forty-seven percent of respondents were C-suite executives. With respect to tariffs, just 16% of respondents said they will pass on the full cost, with 51% saying they’ll pass on some of the costs and 33% saying they won’t pass along any.
But for the big players, price increases may be unnecessary. “Large chipmakers seem more likely to make significant operational changes,” the KPMG report said.
Semiconductor analyst at Wedbush Securities Matt Bryson agreed. “Particularly the larger companies -- they have multiple facilities that they’re supplying product out of that they can shift mix,” he said, meaning that large companies can shift production away from China.
Bryson explained that, when a chip is manufactured, it moves to different plants to be processed and finished before shipment to another country for its end-market buyer. Large companies are able to that ship chips into the U.S. from nations not subject to tariffs. "If I manufacture a wafer in China and that piece is packaged in Taiwan, there’s no tariff implication,” Bryson said. "That piece gets shipped from Taiwan into the U.S.”
KPMG noted that “moving manufacturing operations out of China is more difficult and more expensive for smaller companies without an established global supply chain."
Alliance Bernstein semiconductor analyst Stacy Rasgon agreed that smaller companies may be more at risk from the tariffs.
Bryson noted that while many chip companies are not very public with announcing production moves, Nvidia (NVDA) - Get Report has made it clear to analysts that it has “fully mitigated” the supply chain risk by moving enough production out of China.
As for memory, Micron (MU) - Get Report said on its earnings call for its June quarter of 2019, it experienced a 30 basis point drag on its gross margin as a result of tariffs, but that it had mitigated 90% of the tariff impact by moving some production into Taiwan and Japan.
While earnings growth now looks solid for chip makers, many of them trade at rather expensive valuations. Micron trades at 16.5 times next year’s earnings, compared to its average multiple in the past five years of 10.1. Nvidia is valued at 34 times earnings, compared with its five year average of 32.