Investors shouldn’t assume that nothing will happen this time, when it comes to risk for the tech sector stemming from the US trade war with China.
We see a heightened possibility that supply chains could be changing dramatically. A decoupling from China would significantly affect technology companies, particularly hardware sellers. Case in point: Apple AAPL recently announced plans to move the production of most iPhones sold in the US to India by the end of 2026, according to Bloomberg.
And while tariff risks are far-reaching, there are tech industries that could prove to be stable amid the dramatic shakeup.
These are among the takeaways in the recently published report, Guidebook to Technology Investments Amid Tariffs.
High-Risk Hardware: Smartphones, Personal Computers, and Servers
Of the hardware sellers we cover, roughly 60% of smartphones and PC supplies would be subject to tariffs on China. We think servers would be much less disrupted, with most shipments coming from Mexico and Taiwan.
While some hardware industries like PCs and smartphones have been reclassified under the semiconductor exemption, it‘s likely the Trump administration is simply preparing specialized tariffs for these items soon.
Notably, Motorola MSI is one of the few bright spots where we see minimal China exposure (both in the supply chain for assembly and even in the final bill of materials), even though it is a hardware vendor.
Here’s what we see as tariff risks for the hardware industry:
Smartphones: We estimate that one of the hardest hit supply chains will be for smartphones. Under our coverage, this primarily affects Apple, which still has most of its iPhones assembled in China. We estimate that roughly 80% of imported smartphones were from China in 2024.Personal Computers: We estimate the PC supply chain will also be affected materially. Just over 60% of imported PCs come from China, with Vietnam being the second-largest source of PC imports. We think the PC supply chain would be a little easier to move than that of the iPhone because PCs are a bit less technical, and there is an emerging base in Vietnam.Servers: We estimate that servers would be more insulated than most would expect. Mexico is the dominant import hub for servers, followed by Taiwan.
Software and Cybersecurity Industries Could Be Lower Risk, but Not Without Exceptions
All investors should seriously consider what risks they are willing to bear at what price, and consider lower-risk areas, which we believe will be software and cybersecurity.
Cybersecurity: We think cybersecurity is set to benefit from a long-term, structural increase in spending, and we would recommend looking for opportunities here during a tariff-driven selloff. Among cybersecurity names, we prefer Palo Alto Networks PANW, which has a Morningstar Economic Moat Rating of wide.Software: Among software names, we prefer wide-moat-rated Adobe ADBE and Microsoft MSFT as we see less risk of tariff disruption. We would also call out exploratory data analysis players Synopsys SNPS and Cadence CDNS as potentially more stable picks within the semiconductor industry. They are software providers, and they are used by engineers, so their revenue flows are typically more stable. Although one risk we would highlight for both is their low teens revenue exposure to China.
Software is exempt from any direct tariffs. But there are still risks that come from a weakening economy.
Shopify SHOP could be most at risk from tariff issues because of the removal of duty-free treatment. A material portion of gross merchandise value likely comes from retailers selling into the US market that import their products from China and Hong Kong. We estimate that roughly 55% of gross merchandise value was likely based on sales to the United States.
Alphabet GOOGL and Meta META could face some headwinds, driven by less ad spending by Chinese-based companies, notably Shein and Temu. We’re already seeing data indicating this is happening. We expect a 75% decline in spending by Chinese-based firms could result in a decline in revenue of $2 billion for Meta and $1 billion for Google. This decline is already accounted for and priced into our current stock valuations.
Technology Sector Uncertainty: Why Markets Will Remain Volatile
We try not to predict short-term market psychology, but we think investors need to seriously consider the medium-term costs of dramatically shifting the current global supply chain. There could be relief rallies as positive news on “deals” comes out. We could also see additional measures, such as lower taxes or other reinvestment mechanisms aimed specifically at encouraging domestic investment.
However, we think investors should not be fooled by any shortsighted optimism in this phase. If the Trump administration is trying to change supply chains dramatically, there will still be a long road ahead.
Even if supply chains do not change materially, the actions being taken today still could cause a recession.
Investors need a new playbook to outline the new risks they are dealing with, as some companies will be hit more than others.
This article was compiled by Marissa Monson.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
