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Chip Stocks Tumble as US Plans to Tighten China Restrictions
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In a significant development for the semiconductor industry, the Biden administration is reportedly planning to tighten restrictions on chip exports to China. This news, first reported by Bloomberg citing people familiar with the matter, has sent shockwaves through the market.
Following the Bloomberg report, shares of major semiconductor companies took a nosedive, with NVIDIA Corporation (NVDA - Free Report) dropping 6.6%, Advanced Micro Devices, Inc. (AMD - Free Report) declining 10.2%, Micron Technology, Inc. (MU - Free Report) falling 6.3% and Marvell Technology, Inc. (MRVL - Free Report) plunging 10.2%.
One-Year Price Performance
Image Source: Zacks Investment Research
The Biden Administration's Plan
The proposed measures are part of a broader strategy to curb China's access to advanced semiconductor technology, which is deemed critical for both commercial and military applications. The U.S. government aims to maintain technological superiority and safeguard national security interests by tightening export controls.
Citing the sources, Bloomberg revealed that a key component of this plan involves the Foreign Direct Product Rule (“FDPR”), a regulation first introduced in 1959 that allows the United States to control the sale of products made using American technology, regardless of where they are manufactured.
This provision could be applied to companies such as Tokyo Electron and ASML Holding NV, which play crucial roles in the global semiconductor supply chain. According to the Bloomberg report, the Biden administration has been discussing this measure with allies in Tokyo and The Hague, emphasizing the potential for its implementation if these countries do not tighten their restrictions on China.
Impact on US Chip Makers
The restrictions under discussion could have far-reaching implications for the U.S. semiconductor industry. Companies like NVIDIA, Advanced Micro Devices, Micron and Marvell, which have significant exposure to the Chinese market, are likely to feel a significant impact. China is a major consumer of semiconductors, accounting for a substantial portion of global demand. Any disruption in this market can lead to substantial revenue losses for these companies.
NVIDIA is already witnessing the heat of earlier bans on selling its advanced artificial intelligence (AI) chips to China. The country usually accounted for more than 20% of its total revenues. However, from the fourth quarter of fiscal 2024 onward, China’s contribution to NVIDIA’s total revenues has dropped to the high-single-digit range.
Marvell has a larger exposure to the Chinese market from where it generates around 45% of its total revenues. For Advanced Micro Devices, China accounted for 15% of its 2023 total revenues. Last year, Micron revealed that it derives more than 10% of its revenues from mainland China.
The broader implications of these restrictions extend beyond individual companies. The semiconductor industry is highly interconnected, with complex global supply chains. Any disruption in one part of the chain can have cascading effects on the entire industry. The heightened restrictions could lead to supply-chain disruptions, increased production costs, and delays in product development and delivery.
Moreover, these restrictions could accelerate China's efforts to achieve semiconductor self-sufficiency. The Chinese government has been investing heavily in its domestic semiconductor industry to reduce dependence on foreign technology. While this transition will take time, the new restrictions could provide additional impetus for China to expedite its semiconductor development initiatives.
Conclusion
The tightening of chip access restrictions on China is set to have profound implications for U.S. chip makers' long-term growth prospects. Companies like NVIDIA, Advanced Micro Devices, Micron and Marvell have seen their valuations skyrocket over the past year, driven by the booming demand for AI and advanced computing technologies. These optimistic projections have fueled significant investor enthusiasm, with expectations of explosive growth in revenues and market share.
However, the recent plunge in these chip stocks, spurred by the Biden administration's plans to impose stricter export controls, highlights the fragility of this optimism. Investors now seem to be increasingly concerned that these companies may face substantial headwinds due to the enhanced restrictions on chip exports to China, a critical market for their products. The potential disruption in supply chains, coupled with limited access to a lucrative market, poses a significant risk to the growth trajectories of these semiconductor giants.
Currently, NVIDIA sports a Zacks Rank #1 (Strong Buy), while Micron has a Zacks Rank #2 (Buy). Meanwhile, Advanced Micro Devices and Marvell each carry a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
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Chip Stocks Tumble as US Plans to Tighten China Restrictions
In a significant development for the semiconductor industry, the Biden administration is reportedly planning to tighten restrictions on chip exports to China. This news, first reported by Bloomberg citing people familiar with the matter, has sent shockwaves through the market.
Following the Bloomberg report, shares of major semiconductor companies took a nosedive, with NVIDIA Corporation (NVDA - Free Report) dropping 6.6%, Advanced Micro Devices, Inc. (AMD - Free Report) declining 10.2%, Micron Technology, Inc. (MU - Free Report) falling 6.3% and Marvell Technology, Inc. (MRVL - Free Report) plunging 10.2%.
One-Year Price Performance
Image Source: Zacks Investment Research
The Biden Administration's Plan
The proposed measures are part of a broader strategy to curb China's access to advanced semiconductor technology, which is deemed critical for both commercial and military applications. The U.S. government aims to maintain technological superiority and safeguard national security interests by tightening export controls.
Citing the sources, Bloomberg revealed that a key component of this plan involves the Foreign Direct Product Rule (“FDPR”), a regulation first introduced in 1959 that allows the United States to control the sale of products made using American technology, regardless of where they are manufactured.
This provision could be applied to companies such as Tokyo Electron and ASML Holding NV, which play crucial roles in the global semiconductor supply chain. According to the Bloomberg report, the Biden administration has been discussing this measure with allies in Tokyo and The Hague, emphasizing the potential for its implementation if these countries do not tighten their restrictions on China.
Impact on US Chip Makers
The restrictions under discussion could have far-reaching implications for the U.S. semiconductor industry. Companies like NVIDIA, Advanced Micro Devices, Micron and Marvell, which have significant exposure to the Chinese market, are likely to feel a significant impact. China is a major consumer of semiconductors, accounting for a substantial portion of global demand. Any disruption in this market can lead to substantial revenue losses for these companies.
NVIDIA is already witnessing the heat of earlier bans on selling its advanced artificial intelligence (AI) chips to China. The country usually accounted for more than 20% of its total revenues. However, from the fourth quarter of fiscal 2024 onward, China’s contribution to NVIDIA’s total revenues has dropped to the high-single-digit range.
Marvell has a larger exposure to the Chinese market from where it generates around 45% of its total revenues. For Advanced Micro Devices, China accounted for 15% of its 2023 total revenues. Last year, Micron revealed that it derives more than 10% of its revenues from mainland China.
The broader implications of these restrictions extend beyond individual companies. The semiconductor industry is highly interconnected, with complex global supply chains. Any disruption in one part of the chain can have cascading effects on the entire industry. The heightened restrictions could lead to supply-chain disruptions, increased production costs, and delays in product development and delivery.
Moreover, these restrictions could accelerate China's efforts to achieve semiconductor self-sufficiency. The Chinese government has been investing heavily in its domestic semiconductor industry to reduce dependence on foreign technology. While this transition will take time, the new restrictions could provide additional impetus for China to expedite its semiconductor development initiatives.
Conclusion
The tightening of chip access restrictions on China is set to have profound implications for U.S. chip makers' long-term growth prospects. Companies like NVIDIA, Advanced Micro Devices, Micron and Marvell have seen their valuations skyrocket over the past year, driven by the booming demand for AI and advanced computing technologies. These optimistic projections have fueled significant investor enthusiasm, with expectations of explosive growth in revenues and market share.
However, the recent plunge in these chip stocks, spurred by the Biden administration's plans to impose stricter export controls, highlights the fragility of this optimism. Investors now seem to be increasingly concerned that these companies may face substantial headwinds due to the enhanced restrictions on chip exports to China, a critical market for their products. The potential disruption in supply chains, coupled with limited access to a lucrative market, poses a significant risk to the growth trajectories of these semiconductor giants.
Currently, NVIDIA sports a Zacks Rank #1 (Strong Buy), while Micron has a Zacks Rank #2 (Buy). Meanwhile, Advanced Micro Devices and Marvell each carry a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.