The US stock hardware sector faces risks from tariffs and a slowdown in government spending, while Morgan Stanley is optimistic about high-value-added software companies

According to the Zhitong Finance APP, JP Morgan has released a research report on the North American hardware and networking equipment industry. It mainly discusses the impact of the current international trade environment, particularly factors such as tariff policies, the slowdown of U.S. federal government spending, and supply chain adjustments on the hardware and networking equipment industry.

Impact of Tariffs

Morgan Stanley analyzed the impact of tariffs on the hardware and networking equipment industry and proposed a relative risk ranking. The firm believes that hardware companies with a high software content are less affected by tariffs because they can offset the increased hardware costs through software services. In contrast, companies that rely on low-margin standardized IT hardware products face greater tariff risks.

Consumer Electronics Hit Hardest: The PC and printer markets, due to high demand price elasticity, have become the most severely affected areas. Companies like HP (HPQ.US) face a double dilemma—its supply chain in China still accounts for 35%, while fierce price competition in the North American market (with an industry average net profit margin of only 3.8%) severely restricts cost pass-through ability.

Server Industry Under Siege: Dell (DELL.US) and HPE's (HPE.US) assembly plants in Mexico (accounting for 60% of global capacity) combined with tariffs on Chinese components create a 15% overall cost increase. Companies plan to hedge pressure through an 8-10% price increase, but customers may turn to emerging manufacturing bases like Vietnam and India.

Networking Equipment Shows Resilience: Cisco (CSCO.US) and Arista (ANET.US), with software-defined architectures (where software value accounts for 30-40% of the total system price), only need a 5% price adjustment to absorb cost pressures. Their capacity layout in Southeast Asia (with Malaysia accounting for 30% of Arista's total capacity) further buffers the impact of tariffs.

Impact of Reduced Federal Spending

The report also analyzes the impact of the slowdown in U.S. federal government spending on the hardware and networking equipment industry. Most companies have a low reliance on revenue from the U.S. federal market (averaging about 5%), and certain companies (such as Axon and Motorola) may be less affected due to the importance of their products for critical tasks like law enforcement.

In contrast, OEMs and channel partners supporting personal computer sales may face greater risks. Companies that heavily rely on the federal government market (such as CDW, Dell, HPE, Ingram Micro, and Keysight) may face significant risks.

Supply Chain Adjustments

NVIDIA's CoWoS advanced packaging order adjustments mainly affect optical communication module suppliers. However, the impact on other companies is limited. Although these cuts do not significantly affect growth expectations for the supply chain, they may exert some pressure on the valuation multiples of related companies.

Fabrinet (with 18% of its supply chain from NVIDIA) faces downward pressure on valuation multiples, with its 25x forward PE potentially returning to the industry average of 20x. Secondary impacts extend to Amphenol (with 12% from connector business) and Coherent (with 8% from optical components), but basic material suppliers like TE Connectivity are less affected Industry analysts point out that the iteration cycle of CoWoS technology has been shortened to 12-18 months, and the current adjustment is a normal technological transition. Companies like Lumentum are expanding their R&D investment in silicon photonics technology (with a 15% increase in the R&D budget for 2025) and are building next-generation optical interconnect solutions, expecting to restore growth momentum by 2026.

Summary

Morgan Stanley expects that companies with the highest software added value in hardware equipment will face the least tariff pressure due to rising costs. Within the overall coverage, the firm believes that product gross margin is a key indicator of software added value, thus network equipment and storage companies are generally less impacted by tariffs, while IT hardware products with high standardization and lower gross margins face greater pressure.

In addition, electronic manufacturing services (EMS) companies and distributors/value-added resellers (VARs) find it relatively easier to pass on rising costs to customers. Although most companies have developed flexible supply chain contingency plans to cope with potential tariffs before 2025, personal computers and server products still have a high dependence on the Chinese supply chain, while network equipment is overall less affected by tariffs in the countries concerned