National security at stake? Applied Materials’ alleged export violations under the US govt’s microscope!

The US government has intensified its scrutiny of Applied Materials Inc., a prominent American semiconductor equipment manufacturer, for allegedly facilitating the shipment of chip manufacturing tools to China without the necessary export licenses. This investigation has far-reaching implications for the semiconductor industry, highlighting the complex interplay between national security concerns and global supply chains.

Background of the Investigation

Initial Subpoenas and Compliance

Applied Materials, in a recent filing with the Securities and Exchange Commission (SEC), revealed that it had received an additional subpoena from the US Commerce Department’s Bureau of Industry and Security (BIS). This marks the third subpoena from the BIS, further escalating the investigation. The company had previously received subpoenas from the US Attorney’s Office for the District of Massachusetts in August 2022 and February 2024, along with another subpoena from the SEC in February 2024.

Company’s Response

In its statement, Applied Materials expressed its commitment to full cooperation with the ongoing government investigations. “We are cooperating fully with the government in these matters. These matters are subject to uncertainties, and we cannot predict the outcome,” the company said. This cooperative stance underscores the company’s acknowledgment of the gravity of the allegations and its intent to comply with regulatory scrutiny.

Allegations and Sanctions

Bypassing US Sanctions

The core of the investigation centers on claims that Applied Materials circumvented US sanctions by shipping semiconductor manufacturing equipment worth hundreds of millions of dollars to Semiconductor Manufacturing International Corporation (SMIC), a partly state-owned Chinese entity. These shipments were allegedly routed through a South Korean subsidiary, raising concerns about potential violations of export control regulations.

Sanctions on SMIC

In 2020, the US Commerce Department added SMIC to its sanctions list, necessitating individual export licenses for companies wishing to sell equipment to SMIC. The situation further escalated when SMIC was placed on the Entity List, significantly tightening restrictions on its ability to procure US products and services. These measures were part of broader efforts to curb China’s access to advanced semiconductor technology amid rising geopolitical tensions.

Timeline and Key Developments

Discovery of Advanced Chips

The investigation gained momentum in September 2023 when it was discovered that the Huawei Mate Pro 60 contained 7nm, 5G-enabled chips produced by SMIC. This revelation was significant because, until then, SMIC was only known to manufacture 14nm semiconductors. The presence of these advanced chips in Huawei’s flagship device suggested that SMIC had made substantial technological strides, potentially with the aid of US-origin equipment.

Investigation by the Department of Commerce

The Department of Commerce launched its investigation following the discovery of the advanced chips in Huawei’s Mate Pro 60. This move underscored the US government’s determination to enforce export control laws rigorously and prevent the transfer of sensitive technologies that could enhance China’s strategic capabilities.

Implications and Uncertainties

National Security Concerns

The allegations against Applied Materials underscore the national security concerns associated with the transfer of advanced semiconductor manufacturing technology to China. Semiconductors are critical components in various technologies, including military applications, making their control a matter of strategic importance.

Industry Impact

The investigation into Applied Materials could have significant repercussions for the semiconductor industry. As a leading supplier of chip manufacturing equipment, any disruptions in Applied Materials’ operations could affect global supply chains and impact the production capabilities of semiconductor manufacturers worldwide.

Regulatory Scrutiny and Compliance

The ongoing scrutiny highlights the importance of robust compliance mechanisms for companies operating in the high-tech sector. Ensuring adherence to export control regulations is crucial to avoid legal repercussions and maintain operational integrity in a highly regulated environment.

Applied Materials (AMAT) Technical Analysis

Price and Moving Averages:

• The stock price is currently at $221.34.
• The 50-day moving average (blue line) is at $209.40, indicating a bullish trend as the current price is above this moving average.
• The 200-day moving average (red line) is at $171.77, also suggesting a long-term bullish trend.

Volume:

• Volume shows moderate trading activity, with spikes indicating periods of higher buying or selling interest.

Relative Strength IndexIn the world of technical analysis, the Relative Strength Index (RSI) stands as a cornerstone tool for traders seeking insights into market momentum. Developed by J. Welles Wilder ... More (RSI):

• The RSI is at 63.72, which is in the neutral to slightly overbought range. This indicates that the stock has some upward momentum but is not yet in overbought territory (above 70).

On Balance VolumeThe On Balance Volume indicator (OBV) is a technical analysis tool used to measure the flow of money into and out of a security over a specified period of time. It is a cumulative ... More (OBV):

• The OBV is slightly declining, suggesting that the volume on down days is slightly outweighing the volume on up days. This could indicate some distribution or selling pressure.

Stochastic RSIIn the realm of technical analysis, the Stochastic RSI (StochRSI) emerges as a powerful tool for traders seeking to navigate market dynamics with precision. Developed by Tushar S. ... More:

• The Stochastic RSI is at 0.999, indicating overbought conditions. This suggests that the stock may be due for a short-term pullback.

Average Directional IndexThe Average Directional Index (ADX) stands as a cornerstone indicator in the toolkit of technical traders, offering insights into the strength of market trends. Developed by Welles... More (ADX):

• The ADX is at 22.02, which indicates a weak trend. Generally, an ADX above 25 is considered to indicate a strong trend, so the current trend strength is modest.

Chaikin OscillatorNamed after its creator Marc Chaikin, the Chaikin Oscillator stands as a formidable tool in the arsenal of technical analysts. This oscillator is designed to measure the accumulati... More:

• The Chaikin Oscillator is at -1,184,956, which indicates bearish momentum. This oscillator considers both price and volume to gauge money flow, and a negative value suggests selling pressure.

Time-frame Signals:

• 3-month outlook: The stock is in an uptrend with current price action above both the 50-day and 200-day moving averages. However, with the RSI approaching overbought levels and the Stochastic RSI already overbought, there could be a short-term pullback. Recommendation: Hold.
• 6-month outlook: Assuming the uptrend continues and the moving averages maintain their current trajectory, the stock is likely to perform well in the medium term. However, watch for signs of weakening trend strength (as indicated by ADX) and distribution (as suggested by OBV). Recommendation: Hold.
• 12-month outlook: The long-term uptrend is strong, indicated by the stock’s position above the 200-day moving average. If the stock can maintain its current levels and the overall market conditions remain favorable, the outlook remains positive. Recommendation: Buy.

Overall, the stock shows strong bullish characteristics but with potential short-term volatility. Monitoring the RSI, Stochastic RSI, and volume trends will be crucial for assessing any changes in the stock’s momentum.

Looking Ahead

The US government’s investigation into Applied Materials for allegedly facilitating unauthorized shipments of chip manufacturing tools to China is a critical development with far-reaching implications. As the investigation unfolds, the semiconductor industry will closely watch the outcome, given its potential to reshape regulatory practices and impact global supply chains. Applied Materials’ cooperation with the investigation and the eventual findings will be pivotal in determining the future landscape of the semiconductor manufacturing sector.