Shares of Broadcom Inc. (NASDAQ: AVGO) tanked on Friday after the chipmaker reported disappointing quarterly revenue and downgraded its outlook for fiscal 2019. The revenue miss triggered a steep selloff in the semiconductor industry, which is still suffering the side-effects of a prolonged U.S.-China trade war.

 

AVGO Q1 2019 Earnings Summary

  • Revenue: $5.52 billion
  • Earnings: $5.21 per share, excluding certain items

 

Weak Revenues Weigh on Broadcom

Export restrictions and declining demand in key segments were the main factors behind the downgrade.

Broadcom’s stock began to tumble late Thursday after the San Jose-based chipmaker reported mixed quarterly results that raised alarm bells over the ongoing saga between the U.S. government and Huawei, the Chinese telecommunications giant.

For its fiscal second quarter ending May 5, Broadcom reported per-share earnings of $5.21 on revenue of $5.52 billion. Analysts in a median estimate were calling for earnings of $5.16 per share on revenue of $5.68 billion.

The semiconductor solutions segment, which is responsible for nearly three-quarters of company revenues, produced $4.09 billion in sales compared with $4.18 billion expected.

Weaker than expected revenues forced Broadcom to slash its guidance for the fiscal year. In 2019, the company expected to generate $22.50 billion in revenue, which is well below the $24.31 billion analysts had expected.

Export restrictions and declining demand in key segments were the main factors behind the downgrade.

“We currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on one of our largest customers,” Broadcom CEO Hock Tan said in a statement, according to CNBC. “As a result, our customers are actively reducing their inventory levels, and we are taking a conservative stance for the rest of the year.”

 

Semiconductor Stocks Slide

Broadcom’s disappointing sales figures triggered a large-scale dump of AVGO stock that dragged on the entire semiconductor segment. AVGO shares declined by as much as 8.6% Friday morning before paring losses later in the session. The stock is down more than 17% from its recent high and is fast approaching bear-market territory.

Broadcom shares are fast approaching bear-market territory

Broadcom Share Price YTD - June 14 2019

Source: Yahoo Finance

Shares of information technology companies also declined sharply, with semiconductors and related equipment makers shouldering the heaviest losses. The S&P 500’s semiconductors index plunged 2.8% on Friday. The segment is down nearly 6% over the past month.

Semiconductor Index

S&P 500’s semiconductor index has significantly underperformed the benchmark index. | Source: Fidelity.

Conclusion

The ongoing U.S.-China trade war is taking a big toll on semiconductor stocks, and Broadcom is caught right in the middle. Last year, the company sold $900 million worth of goods and services to Huawei. Unless a new trade deal is worked out, a government ban on the Chinese telecom giant could commence once the current 90-day license extension ends. Read more: Huawei Saga Takes Another Unexpected Turn.

Disclaimer: Author has no investment stake in Broadcom at the time of writing.