The trade war finally hits the technological values

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Nearly lost in geopolitical turmoil last week were smiling results and comments from
Cisco Systems

it could be a nasty turning point for technology and the trade war.

On Thursday, Cisco action (symbol: CSCO) plunged 9%, a day after the publication of the July financial results. The company, a leading manufacturer of routers, switches, and security products, is seen as an indicator of technology spending, given its broad exposure to the end markets of businesses, governments, and telecommunications.

Although the networking equipment manufacturer beat profit forecasts, investors were disappointed by its weaker than expected sales outlook. The company expects this quarter's sales to be stable and is expected to grow by 2% over the previous year. This is a significant decrease from the overall growth of 7% recorded last year. Order growth also slowed significantly to stabilize compared to 4% in the previous quarter.

But the most disturbing were the factors cited by management for the mixed forecast.

Sales in China "dropped sharply in the light of commercial discussions," said Chuck Robbins, CEO of Cisco, at the end of the company's results call. "We are not invited to bid. We are not even allowed to participate [in large China enterprise deals] more. "

Cisco sales in China suddenly dropped by more than 25% in July. While China accounts for less than 3% of Cisco's total revenue, this could indicate an increase in anti-US equities. feeling likely to harm other technology companies more exposed to China. Wall Street takes note of the trend.

"Clearly, the [Cisco] The organization sees retaliation associated with the current trade war between the United States and China, "said Thursday Jefferies analyst George Notter.

Even before Cisco's comments, there were many concerns about the change of opinion. At the beginning of last week, Sophie Huynh, strategist at Société Générale, predicted that Chinese decision-makers could spark a "nationalist" spirit in China and push consumers to favor Chinese brands over American products.

It is increasingly negative about technology stocks, saying investors may be overly optimistic about the sector's growth prospects as the impact of the trade war intensifies.

"We are seeing an imminent economic slowdown and the ongoing trade dispute between China and China weighing on the performance of the medium-term technology sector," Huynh wrote on August 12. "The US technology sector is one of the obvious victims of the US-China trade war."

Cisco is not alone in reporting risks. Earlier this month, a data storage and management company
NetApp

(NTAP) blamed a weakening global economy for its weaker than expected pre – announcement, which resulted in a 20% decline in stock prices over a day.

"Our largest global corporate accounts have adopted a more cautious view of the macroeconomic environment," NetApp chief executive George Kurian said on August 1.

Fred Hickey, editor of High Tech Strategist, said the fundamentals of technology stocks were clearly deteriorating, citing the results of Cisco and NetApp.

"Excessively high levels of debt globally, accelerated trade wars and cuts in capital spending are causing economic slowdowns all over the world (especially outside the United States)," he said. he wrote in an email last week. "We can look forward to more of these disappointments in the second half."

Cisco's caution has gone beyond China's borders. "In July, we saw some slight early signs of some macroeconomic changes that we had not seen in the previous quarter," said CEO Robbins. "We just felt a slight difference in July compared to closing rates. And it just was not as solid a finish as we normally expected, especially in the fourth quarter. And I think that's what triggered the flags [CFO] Kelly [Kramer] and me."

If companies were unsure of their spending decisions in the last quarter, the sentiment certainly did not improve. Last Wednesday, the data showed that the German economy, which was dependent on exports, had contracted in the second quarter, while China had published disappointing data on industrial production.

And the random trade policy of the United States only seems to become more and more random. The month began with President Donald Trump's decision to impose a 10% tariff effective September 1 covering additional imports of $ 300 billion from China. But after a sharp decline in stock markets, the US Trade Representative announced that it would delay the new tariff on some products until December 15th.

While inventories have fallen behind, it is likely to be a temporary reprieve. "Tariffs remain the most important source of risk for equities," JPMorgan's Dubravko Lakos-Bujas said Friday, noting that two-thirds of the product categories in the latest series of tariffs are technology and discretionary consumption.

If Cisco's comments turn out to be a negative sign of global economic activity, which areas of technology could be most at risk?

These may be chip stocks, which have great exposure to international markets and are still rising sharply in the year. The iShares PHLX Semiconductor (SOXX) exchange-traded fund grew 28%, compared to 15% for the S & P 500, in the hopes of a second half recovery that may not occur.

Stacy Rasgon, an analyst at Bernstein, said he expects cuts in earnings estimates and lower valuations to become more positive on the chip sector. He explained how, historically, global semiconductor sales are directly correlated to global growth in gross domestic product.

"The semifinals are exposed to the macro," he says. "I'm pretty cautious about space in general at the moment. The general data points we leave the macro environment do not help us. "

Write to Tae Kim at [email protected]