Could Trump’s China Ban Hurt U.S. Companies?

Could Trump’s China Ban Hurt U.S. Companies?

The President’s war against TikTok has expanded to Tencent Holdings this week after he signed an executive order banning ‘transactions’ with both companies.

Aug. 7, 2020

On Thursday, President Trump signed an executive order which effectively formalized the 45-day deadline by which Microsoft (NASDAQ: MSFT) can buy TikTok. If you have been living under a rock and aren’t aware, then here’s a brief summary:

  • TikTok is a video making app with 100 million users in the U.S.
  • President Trump wants to ban the ByteDance-owned app in the U.S. due to privacy issues regarding its status as a Chinese company. 
  • Microsoft is in talks to buy the U.S., Canadian, and Australian operations of TikTok so it can remain in the U.S. 
  • Microsoft has until September 20 to close the deal or it will be banned. 

Just look at our returns versus that of the S&P 500! Click here to find out how we continue to beat the market and view the list of stocks we think will turn out to be the next Amazon, Tesla, or Netflix!

The move is an odd one from Microsoft, but realistically, it’s probably the only Big Tech company that can buy it, as antitrust is already breathing down Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOG), and Facebook’s (NASDAQ: FB) necks. 

However, this newly signed executive order has added another Chinese company to its ban list: Tencent Holdings. This could prove disastrous for some U.S. companies, and in particular the gaming industry. 

What companies will this hurt?

Gaming is having a moment right now, as evidenced by Take-Two Interactive (NYSE: TTWO) and Activision Blizzard’s (NASDAQ: ATVI) blowout earnings this week. Meanwhile, Tencent is one of the world’s largest and most valuable gaming companies with stakes in a number of U.S. gaming firms, including Riot Games, Epic Games, which makes “Fortnite”; and Activision Blizzard. 

Queue conspiracy theories about the war against ‘Fortnite’:

The move could seriously affect revenue for these companies should Tencent be forced to pull out, with Epic Games likely to be the worst affected. The company owns Unreal Engine, which is the most widely-used gaming engine on the market and is funded by Tencent. If this is taken off the market, then hundreds of game developers will be forced to make their own engines, a timely and very costly undertaking. 

Then consider the knock-on effect this will have on companies that rely heavily on the gaming industry such as Nvidia (NASDAQ: NVDA) or Advanced Micro Devices (NASDAQ: AMD). Should the gaming industry falter — one of their primary client bases — revenue will take a hit. 

And it’s not just gaming, as Tencent has a large stake in companies such as Tesla (NASDAQ: TSLA) and Snap (NASDAQ: SNAP), and streaming deals with the already-suffering NBA, NFL, and MLB. Google and Apple also have thousands of Tencent-owned apps on their respective stores; what happens to them? 

The devil’s in the details

There is still some hope yet that the effects will not be so far-reaching. Trump’s executive order specifically sought to target Tencent’s ‘WeChat’ — a Chinese equivalent of Whatsapp — and it is still unclear whether other operations will fall under its spotlight. The President specifically singled out WeChat due to its 1 billion global users and how its “data collection threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information.”

Still, the wording of the order is confusing when reading deeper into it, and sounds like it could be about more than just WeChat: “any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent Holdings Ltd. … Shenzhen, China, or any subsidiary of that entity.”

Remember when this was solely about TikTok? Simpler times… Anyway, it is very likely that the executive order will now be challenged in court due to the possible consequences for U.S. companies. 

Let’s not forget TikTok

Microsoft now officially has until September 20 to close out this deal with TikTok, but it may have other worries as Facebook has gone and launched a competitor: ‘Reels’. The Instagram addition sent Facebook’s shares up 6% following its launch on Thursday. It is a short-form video feature that allows Instagram users to create content with overlaid audio and augmented reality effects — sound familiar?

What started off as a simple data privacy inquiry appears to be turning into a full-scale sub-war in the ongoing conflict between the U.S. and China. Fear of a renewed trade war or falling out between the world’s two largest economies are the last thing anyone needs in a reality plagued by a pandemic.

MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.