The Trump administration's sweeping new tariffs on imports are likely to create demand headwinds for the semiconductor sector, UBS analysts said in a note, warning that the outcome of the policy shift is "worse than expected."
While the direct impact on most major chipmakers is minimal, the knock-on effect of higher costs for electronic goods and IT infrastructure could weigh on demand, the analysts wrote.
"The hope among some investors was that this would serve as a ‘clearing event,’ but we think the outcome was generally worse than expected and ambiguity is still high," they noted.
Semiconductors are exempt from the reciprocal tariff scheme, but UBS warns that the broader impact on electronics and IT supply chains could still be substantial.
'We fear demand destruction'
The semiconductor industry largely avoids direct exposure to the new tariffs, given that few raw chips are imported into the US. However, the tariffs will hit many finished electronic products assembled abroad, potentially reducing demand for semiconductors that power them. "We fear demand destruction more than anything else," UBS said.
UBS pointed to concerns about the effect on Nvidia Corp (NASDAQ:NVDA, ETR:NVD), where costs for AI compute racks could rise, impacting demand. "We believe [Nvidia] recognizes revenue upon shipment of compute trays to ODMs, but end products like GB200/300 racks would still be impacted by higher costs, potentially resulting in demand destruction," the analysts wrote.
The tariff structure could also influence storage preferences, UBS noted, potentially tilting demand toward NAND flash storage over HDDs, given the heavy HDD footprint in Vietnam. Micron Technology Inc (NASDAQ:MU) could see theoretical benefits from such a shift, but UBS flagged that much of its DRAM production occurs in Taiwan and Japan, meaning its products could still face higher costs when integrated and re-imported.
Clarity on AI rules needed
UBS also warned that semiconductor stocks are unlikely to see sustained gains until investors receive more clarity on the upcoming AI Diffusion Rules, set to take effect on May 15. "We struggle to see how semis stocks really work again in earnest until we get clarity on AI Diffusion Rules," the analysts wrote.
Shares of semiconductor companies have been volatile amid shifting trade policies and regulatory uncertainties. UBS said stocks with a US footprint, such as Texas Instruments Inc (NASDAQ:TXN), may not be insulated from the new tariff regime as components are often exported and re-imported, eroding any potential advantage.