AMD and Nvidia Analysts Worry About 25% Tariffs

Updated, 5/10/19, 8:30am PT: The increased tariffs--which jumped from 10% to 25%--went into effect at 12:01am ET on May 10. CNN reported that China's Ministry of Commerce released a statement that read "We hope the United States will meet us halfway, and work with us to resolve existing issues through cooperation and consultation." More information is available via the U.S. Federal Register.

Original article, 5/7/19, 7:26am PT:

U.S. President Donald Trump said in February that he delayed an increase on tariffs affecting goods imported from China because of "very productive talks" between the countries. But on Sunday he increased tariffs on $200 billion worth of goods from 10% to 25% and said he might also apply the 25% tariff to another $325 billion worth of goods. That's bad news for many companies, but it could prove especially problematic for AMD and Nvidia.

The primary concern isn't actually the increased tariffs--investors seem to be more worried that China will cancel its talks with the U.S., leading to increased tension between the countries. Reports about China's intentions have varied over the last few days: The Wall Street Journal reported Sunday that China was thinking about canceling the talks, but CNBC reported soon after that China was still preparing to make a trip to the U.S. this week.

AMD and Nvidia's share prices have ping-ponged as much as those reports. Share prices for both companies fell around 4% early Monday, then picked up slightly before markets closed and have been falling back down so far this morning. Some of this can be attributed to market fluctuations--it's hard to find a tech stock whose price doesn't change daily--but it could also indicate unease about how the companies will fare based on these trade talks.

The worst-case scenario is for these companies to lose China entirely. RBC analyst Mitch Steves told Business Insider: "A major concern here, the products would be deemed mission-critical, and the U.S. would prevent shipments to China, or tax them heavily (a large buyer of GPUs). We think China trade talks will negatively impact our universe. Most notably, we think GPUs and Semi-cap are most at risk to the downside if tensions continue to rise." 

China is an important gaming market. Niko Partners released new research this month indicating that by 2023, China will have more than 354 million PC gamers playing online games, which is greater than the entire population of the U.S. It doesn't take an economic degree to figure out that losing access to such a massive market because of a U.S.-China trade war probably wouldn't be good for AMD and Nvidia's financial results.

That loss isn't guaranteed. Maybe talks between the U.S. and China will improve. Even if they don't, AMD and Nvidia could escape relatively unscathed as long as they aren't barred from selling their products in China. Like we said at the top, the increased tariffs themselves aren't the real fear. AMD CEO Dr. Lisa Su told us as much in January, when she said that her main fear about the trade war was the uncertainty it caused, not the tariffs.