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Ivanna Hampton: The tariff fallout is crushing technology stocks. The good news is several major tech companies are now trading at discounts to our fair values. The bad news is uncertainty is at all-time highs with many tech companies’ supply chains spanning the globe with a heavy concentration in Asia. The Trump administration imposed tariffs on countries there, including China, Taiwan, and South Korea.
Joining me to discuss the risks for the tech industry is Eric Compton. He’s the director of equity research for technology for Morningstar Research Services. Thank you for joining me today, Eric.
Eric Compton: Great to be here. Wish it was under different circumstances.
Go to Morningstar.com for the latest coverage of the Trump Tariffs where our analysts are sharing insights into the market and economy.
Morningstar’s Take on Tariffs: Stock Impacts, Portfolio Tips, and More
How the Tech Sector Has Performed Since Trump’s Tariff Announcement
Hampton: I know. Well, let’s start with Big Tech was already struggling in the first few months of 2025. Can you talk about how the sector has been looking since the tariff announcement?
Compton: Needless to say, the sector has not been looking good. There have not been many places to hide post the tariffs, and technology has not held up well either. Technology has been off even more than the overall indexes, which I would say isn’t too unexpected. Technology tends to be a little bit higher-beta, so you’d expect a little more selloff there. But also specifically related to the tariffs, technology, particularly hardware stocks, have sold off more because a lot of their supply chains are based in a lot of the places you just mentioned, especially in Southeast Asia and in China. And so the more you disrupt those supply chains, the more it could impact those companies.
So, we’ve seen hardware sell off more. We’ve also seen semiconductor stocks sell off a bit. Not quite as bad as hardware, but it’s still pretty bad, more than the overall indexes. I’m sure we’ll get into more details on that later. And then you’ve got software, which has sold off the least, has been a little bit more of a safe haven. That has been closer to the overall indexes in the selloff. Overall, the tech sector has not looked great: hardware hit particularly hard, semis in the middle, software a little bit better. I mean, there are days where I look across our coverage list, and there’s not a single green stock left out of all the roughly 120 stocks we cover. It’s been a rough couple of days.
Read how the tariffs are affecting Big Tech:
Big Tech Supply Chains Hit by Current Tariffs, Services Exempt Currently but Face Risks
Which ‘Magnificent Seven’ Stocks Are Most Vulnerable to Tariffs?
Hampton: Among the tech names in the “Magnificent Seven,” which companies are most vulnerable to tariffs if they persist for the long term?
Compton: One I would immediately highlight is Apple AAPL. So, Apple, you’ve got the hardware exposure, primarily iPhones; they also sell PCs and a couple of other items, like AirPods. But really, iPhones are the key driver for their revenue. And a lot of their supply chain is based across Southeast Asia, including in China. You’ve seen reports from The Wall Street Journal and also from other research shops trying to estimate how much could the average cost of an iPhone go up.
We’ve seen ranges of estimates, but needless to say, if these tariffs stay in place, the cost of an iPhone could go up materially. And that could impact Apple’s margins, it could also impact the number of phones they sell. People either just delaying the refresh cycles or just buying fewer phones in general, or maybe buying less expensive phones. So, there’s all sorts of fallout that could happen from that. And moving these supply chains is difficult, especially for these complex hardware products like an iPhone where you’ve got so many parts, many of which can really only be made in certain areas, particularly Taiwan for the most advanced chips, for example. So, Apple, we see as particularly exposed.
We actually thought Apple was overvalued heading into this. The thesis wasn’t necessarily a tariff thesis, but it was that sales would slow down. And so, I think this is another risk factor to the slowdown in sales. So, Apple would be one I would highlight.
Amazon AMZN would be another one where they do a lot of, not hardware, but they sell a lot of goods, a lot of retail goods. And a lot of the goods they sell, what we would call cogs, or just where they’re from, the cost inputs, those goods are imported. And I’d say, I think if I remember the numbers correctly, roughly 60% of cogs are imported for Amazon. And of that, around 30% are from China, we estimate. They don’t directly disclose that, but we estimate that number. So, material impact there where they would have to think about if these tariffs do stay in place, how do you reorganize the supply chain? How do you bring some of those costs down? What are the impacts on future margins and sales? They’ve had to do that in the past, reorganizing the supply chain. But this would be probably even more monumental than what we’ve seen in the past.
US Stocks Churn Lower as Global Selloff Deepens
Which Tech Stocks are Exempt From the Impact of Trump’s Tariffs?
Hampton: And there are notable exceptions in the tariffs. Semiconductors and services, you brought that up. They’re exempt. What do you make of that?
Compton: It’s really interesting, particularly in the semiconductors, and it gets very complex. As you mentioned, if you go through annex 2 of the executive order, there’s a long list of items that are exempt. And in that list, there are basically different descriptions of semiconductors, integrated circuits. I would call that more like semiconductors in their raw form. The actual integrated circuit forms are exempt. And so, I would say that’s a good thing on the surface.
Also, the way the supply chains work is these products, you might manufacture the chip in Taiwan, then you ship the chip to maybe an assembly area in China. And so they go back and forth manufacturing, assembly, testing, et cetera. And a lot of that can happen outside of the US. And so none of that would be tariffed theoretically, because it all kind of stays outside of the US.
The problem you would run into with semiconductors is the ultimate end products that semiconductors are incorporated into are not just the raw semiconductor. People buy phones, they buy computers, enterprises by servers, storage racks, industrial components, networking switches, all the above. And so all of those items, as far as we can tell, are tariffed. And so, that’s really where you run into the issue where you have a product that’s tariffed, and it might contain the semiconductor parts. So, the semiconductor end products are still going to be more expensive, and there’s risk to sales and margins there as well. Semiconductors are a little complicated, but there are risks there because of the end products they’re incorporated into. And close to 100% of final assembly happens outside of the US. So, it is a big risk for that ecosystem.
The services you also mentioned exempt things like software subscriptions. That actually is one area we think is a better place to hide out right now. Software companies are going to have some exposure to cyclicality related to recession. Or if end markets get weak for them, there can be some decline in, for example, subscriptions or seats sold. But overall, no direct tariffs on software. And so, we think that’s going to be a little bit safer. And we are starting to see some more attractive valuations there.
The one big risk you hear that comes up often with software is, does a country like the EU respond with reciprocal tariffs that specifically target services? Because the US exports more services than they import. And that would be an area where if you wanted to try to gain maximum leverage in a sort of tariff war, that would be an obvious area to look. Our base case right now is that doesn’t happen, but it is a risk worth considering.
Semiconductor stocks during tariffs chaos:
Analog Devices: Stock Appears Cheap Versus Our Fair Value, but Less So If Tariffs Stay in Place
NXP Semiconductors: Fair Value Maintained Despite Tariff ‘Carnage’
Risks to Tech Stocks in a Trade War
Hampton: Let’s stay on the theme of risks. What other risks do you think remain in this trade war?
Compton: A couple I just mentioned. I think a meta risk is escalating tariffs. And so particularly on services, but also we just saw headlines come out a few minutes ago, Trump threatening China with, I don’t know what you would call them, retaliatory tariffs. Basically retaliating to China’s response to the initial tariffs. And so, I think tariffs could still be escalated from here. You don’t know exactly what the end product that all the final tariffs are going to be on, so, particularly around services. So, I would highlight that.
And it seems like there’s less room to negotiate with China. I think investors need to seriously consider what supply chains look like and what the world looks like if tariffs on China do not come off. I think it’s a risk people need to seriously consider.
One of the ramifications of that would be supply chains would need to be dramatically reworked. That’s something we’re actively researching and thinking about. I think investors should not go into this thinking that there’s just going to be a bunch of deals made in the next couple of days, and it’s all going to go away. Maybe that happens, but I don’t think you can go in assuming that. That would be another risk I would think about. And just the broader recession risks, things like that, where things that aren’t really being directly tariffed, but all of the downstream effects from that. So, a lot of things to keep in mind, but those are a few.
China’s Bold Response to US ‘Reciprocal Tariffs’ Unlikely to Be the Last Salvo in Trade War
Are There Opportunities in the Tech Sector After the Stock Selloff?
Hampton: And Morningstar has given tech things, many of them, High Uncertainty Ratings. The stock selloff has walloped the sector. Should investors look for opportunities now? Should they hold off? What should they keep their eye on?
Compton: I think you need to go in with open eyes. I think a couple of regime changes are happening. So one, tech investments are becoming more about geopolitical and supply chain analysis, probably more than they ever have before, which was not the case even a week ago. So, go in with open eyes that a lot of the price movement and a lot of really even the—we’re Morningstar, right? We focus on long-term fundamentals—a lot of the fundamentals, because the supply chain and its structure and the cost we structure that are part of the fundamentals, a lot of that’s going to be determined by policy strategy, reactions, reactions to the reactions, et cetera. So, go in with open eyes on that.
I think uncertainty has definitely increased. Very likely, one of the appropriate responses to this is raising Uncertainty Ratings on a number of our stocks, particularly those with impacted supply chains. And actually, I forget the original question now, but those are some other things I would think about as you think about investing in tech. Things could go lower. And a lot of it’s going to depend on the geopolitical policy, and there’s just a lot of uncertainty around that. And it’s not related to how you would’ve analyzed these companies in the past, I guess.
Opportunities in the Tech Sector:
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Tech Stock Picks During Trump’s Tariff Uncertainty
Hampton: So, hold off or look for opportunities?
Compton: Well, there’s always a price, right? Price matters, price to fair value. The way I would approach it is try to sort things on risks, price, and maybe risk to fair value. And so things like software, I would say, have less risk to fair value, in our opinion, versus hardware, if you have to reorient your entire supply chain in very difficult ways—higher risk to fair value. Exposure to cyclical end markets like autos and industrials—higher risk to fair value. So, I would look at cheap names in places like software, places with exposure to structural demand trends that are unlikely to get disrupted.
One area we’re actively thinking about is AI. You’ve got these hyperscalers with big pockets who view AI as sort of a component of their strategy that’s necessary to compete in the future. So, that maybe has a little more structural demand behind it. And really anywhere you can find where you think revenue’s going to be a little more stable. And yeah, software, names related to the AI theme.
And a couple others we’ve looked at are ones related to maybe more stable government spending. So, the IT consultants are probably a little more uncertain there. But you’ve got companies like Motorola Solutions MSI, public safety spending, and that’s probably not going to change too much. You’ve got companies like Tyler Technologies TYL where they do things like software that makes the court systems work, and so that’s probably not going to get cut. So, those would be the areas we would look. We are seeing more attractive valuations in software, lower risk to fair value changes there. I would look there. Nvidia NVDA and some of the AI chain is starting to get more interesting as well. So I would look there, but going with open eyes, it’s a little more risky.
Hampton: Got it. Well, you gave us a list. Thank you, Eric, for your time today.
Compton: Absolutely. Great to be here.
Hampton: Now, Morningstar analysts are providing an in-depth look at what the tariffs mean for the economy, the market, and you. Check out our collection of articles and videos at Morningstar.com. Click on “Morningstar’s Take on Tariffs: Stock Impacts, Portfolio Tips, and More” and bookmark the page. I’m Ivanna Hampton for Morningstar.
Watch Trump’s Tariffs Upend Global Markets: Here’s What Investors Should Know for more of Morningstar’s coverage on Trump’s tariffs.
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