Policies Advanced By Trump Will Hit Share Price
Policies espoused by the incoming president could depress the share price of Advanced Micro Devices, Inc. (NASDAQ:AMD) to a markedly greater extent than that of its U.S. competitors, and threaten to bring profound change to the world semiconductor market.
Timing is everything. AMD's recent fall in price from a high of $12.42 in December 2016 may see a bounce higher, presenting a good entry point for a short before the heart of a substantial downturn gets underway in coming months if the policies represented by the incoming Trump administration are put into practice as advertised. Taken on a temporary rise close to its December high, a short would then offer an excellent asymmetric return.
The drivers of a prospective decrease in AMD's share price, which are not yet priced in, are as follows:
- A potential U.S.-China trade war, replete with import restrictions and embargoes, damages AMD more than its main competitors, Intel Corp. (NASDAQ:INTC) and Nvidia Corp. (NASDAQ:NVDA) because AMD derives a greater percentage of its revenue from China than do they.
- By including Korea on his hit list of nations practicing unfair trade, Trump implicitly jeopardizes AMD's strategy of contracting with Samsung Electronics Co. Ltd. (OTC:SSNLF) to manufacture its 14nm products, possibly benefiting competitor Intel's foundry operations.
- By disrupting the global market for semiconductor products, Trump's trade policies may force incremental technological realignment of the market to an extent which will produce long-term damage to AMD's market share, revenue and profitability.
- If Trump's trade policy achieves the return of AMD jobs to the U.S., the company's operational cost would be increased as a result, making AMD less competitive in the global marketplace.
- In clamping down on immigration, Trump will in probability reduce AMD's ability to attract sufficient numbers of highly qualified H-1B guest workers when the U.S. has a shortage of highly skilled workers in the science, technology, engineering and mathematics fields, reducing AMD's global competitiveness.
- Trump's stated intention to reduce the corporate repatriation tax to 10% from 35% will favor rivals Intel and Nvidia that have much more overseas cash than AMD, effectively disadvantaging the company.
Strenuously Criticized U.S. Semiconductor Companies
During the election campaign, the new president strenuously criticized U.S. semiconductor companies for their shipping of jobs and profit to China, thereby harming the U.S. economy. His position connected with elements of xenophobia in the electorate as Trump also took a firm stance on immigration.
His stated intention is to return jobs to the U.S. by limiting immigration and by clamping down on free trade with countries like China, which he regards as using unfair trade practices. The semiconductor market lies full square at the heart of this issue, bringing with it great revenue, jobs and the underlying consideration of national security.
Trump's China semiconductor trade policy, if pursued as stated, will almost certainly lead to a trade war, with embargoes and export restrictions. The new president has said he will slash imports from China and impose a 45% import levy.
Ensuing Retaliatory Denial Of Access
An ensuing retaliatory denial of access to U.S. semiconductor companies to the world's single most important semiconductor market of China would inure to the far greater disadvantage of AMD than of its main competitors, Intel and Nvidia. This is because AMD obtains a greater proportion of its revenue from China than does either of those companies.
China is the world's largest producer of PCs and consumer electronics. In the event of a semiconductor trade war, we can expect to see AMD's share price hit more than that of Intel and Nvidia. See:
- AMD: Will Trump's China Trade Policy Push The Company Back Into Losses?
- Nvidia: Will Share Price Fall Substantially In 2017?
Precedent For Retaliation
Trump has posited that China, Korea, Japan, Germany and Taiwan unfairly load trade with the U.S. with their exports to achieve a trade surplus, in China's case with their industry controlled by the government and with the benefit of state funding. Trump intends to limit trade with these countries until the balance of trade is renegotiated. This stance will almost certainly provoke retaliation from China, and for which there is precedent.
Previously, the U.S. imposition of tariffs on Chinese products, specifically automobile tires in September, 2009, ended badly. It resulted in a total estimated cost to U.S. consumers of approximately $1.1 billion in 2011. The cost per job saved has been estimated to be at least $900,000 in that year. Extra money spent by American consumers to purchase tires reduced their disposable income available for other purchases, and thereby indirectly reduced employment in the retail sector.
It has been calculated that tire protectionist measures cost the U.S. a net of 2,531 jobs when new tire manufacturing jobs gained are weighed against retail jobs lost. Also, China retaliated by levying anti-dumping fees on exports by the U.S. of chicken parts, costing the American poultry industry approximately $1 billion in sales. Consequently, the primary beneficiaries of the U.S.-China tire war were alternative exporters from Mexico and Asia, marketing discount tires to the U.S.
Reconfiguration Of Global Semiconductor Market
If a similar scenario emerges from a semiconductor trade war, while there are few products which are directly comparable or competitive with those of American semiconductor companies like AMD, Intel or Nvidia, one possible scenario is that the processor and graphics markets will be under great pressure to realign with the technology of non-American suppliers.
For example, a greater role for ARM technology could develop, with its lower cost, power draw and heat generation. The primary expertise of AMD is x86 architecture, and a strong trend toward ARM would slam the company's share price.
As Trump has included Korea on his hit list for unfair trade practices, this potentially hurts AMD directly. Fabless AMD will rely on Samsung (OTC:SSNLF), headquartered in South Korea, for future 14nm manufacture to reduce the advantage Intel has held in process technology, SoC nodes and microprocessors. Trade restrictions placed on Korea would blight that arrangement. Conversely, trade issues with Korea may benefit Intel's foundry operations, generating more revenue for that company and, by so doing, disadvantaging AMD.
Immigration Cap On Highly Skilled Workers
Depending on how long a trade war continues, it might also render AMD a more vulnerable takeover target for a non-American acquirer like Mubadala Development Company PJSC, which after acquiring AMD when the share price has slumped, could then export to the Chinese market without the burden of semiconductor import tariffs likely being imposed on American companies.
As for immigration, an annual congressional limit of 85,000 is presently imposed on the number of highly skilled guest workers who may be granted the necessary H-1B visas for work in the U.S. That cap is normally used within about five days of the commencement of the calendar year application period. With Trump proposing a reduction of the cap, and when highly skilled U.S. workers with a background in STEM fields are not available to fill all needed positions in such functions as software creation, that would place AMD at a marked disadvantage in the global semiconductor market.
Hope is harbored in some quarters that the reality of the office will moderate Donald Trump's positions to the benefit of American semiconductor companies. In referring to false claims made by the White House concerning crowd size attending the inauguration, The Guardian addressed such hopes.
The weekend activity cast doubt over speculation that Trump, who repeatedly made wildly false statements during his campaign, would be jolted into more sober and conventional operations by the machinery of government and the gravity of his responsibilities.
- The Guardian
The policies promoted by the incoming Trump administration, if applied, pose greater threats to AMD's revenue, profitability, market share and stock price than to other American semiconductor companies.
They also imply the strong possibility of profound change in the world semiconductor market, which could well militate against the fortunes of AMD as customers turn to other technologies such as ARM.
These considerations, not currently priced in, may after an expected return to near previous highs bring about the opportunity for a very profitable short of AMD as the heart of a sizable downturn develops.
Elsewhere on Seeking Alpha:
Follow The Structure Of Price and receive immediate alerts upon publication of future articles by this author. Please click on the "Follow" button at the top of this page next to the author's name and icon, and then select "Real Time Alerts."
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.