US President Donald Trump’s tariffs have rattled the global markets. Tariff rates have been raised to levels not seen in a century, which may set in motion a cascade of supply/demand side shocks, depending on how long and high these tariffs stay.

Why it matters: Software companies are largely sheltered from the impacts of US tariffs. But some communications companies are directly affected by import tariffs. Online marketplaces may face indirect impacts if tariffs cause an economic slowdown in Australia.

Communications companies like Megaport and Audinate, are exposed to physical products being imported into the US, which will be subjected to tariffs. A potential economic slowdown could put pressure on the Australian housing market, car purchasing and employment. But, except for Seek, we don’t anticipate this affecting long-term competitiveness.

The bottom line

Our fair value estimates and estimates stand, mostly because the exact extent and duration of tariffs remain in active flux.

Most directly affected in the short term are no-moat Megaport and narrow-moat Audinate, but the long term value of both companies should be relatively unaffected. Both companies screen as undervalued.

Narrow-moat Xero could be affected by an economic slowdown increasing business failure rates and screens as overvalued.

Narrow-moat Seek could be affected if Australia gets disproportionately affected, which would enable competitors to push it out of Southeast Asia. Seek screens as fair valued.

Coming up

With the exception of China, most of the tariffs have been paused or lowered until mid-July. We will continue to get more clarify then with regard to what part of the announced tariffs are permanent policy versus temporary negotiating tactic.

Megaport MP1

Megaport’s business model is to install racks of servers and connections into data centers, including in the US, and to sell these connections to customers. As such, Megaport may have to pay tariffs on this hardware, depending on where it can source it from.

But Megaport has some flexibility because it can choose to defer or halt these installations, especially with regard to expansion into new data centers. Additionally, competitors face the same problems, and Megaport is more financially stable. Tariffs, therefore, may provide a long-term boost to its competitive positioning.

Audinate AD8

Audinate’s chips and other licensed communications technology are used in audiovisual equipment from hundreds of original equipment manufacturers, mostly out of Asia, and imported into the US. Tariffs will add to the cost of this equipment and may slow the purchasing of this hardware.

However, Audinate’s technology is used by manufacturers in all countries, and therefore end up in any OEM winners out of this trade war, whether in China, Southeast Asia, or the US. In the long term, Audinate’s competitive position is, therefore, relatively unaffected.

Xero XRO

Xero has relatively low-quality customers, primarily small and midsize businesses, which are more sensitive to an economic downturn for their survival. If tariffs end up resulting in a global economic downturn, it is therefore likely that business failure rates increase. Xero’s outsize exposure to Australia and New Zealand could also make this more severe, given that both countries are heavily exposed to China, which has been uniquely singled out thus far.

Over the long term, however, we believe Xero’s competitive position in ANZ is exceptionally strong, while it is very weak in the US. A severe downturn could therefore finally shake Xero out of the US market, although it is still too early to make this our base case.

Seek SEK

Seek could face a long-term fair value decline if tariffs lead to a severe economic downturn, whereby the downturn is more pronounced in ANZ than in the US. Seek’s ANZ business is currently subsidising expansion into Southeast Asia, where it is up against Indeed.

If this funding dries up due to an economic downturn, it may permanently lose market share in these markets, as Indeed, which makes most of its money in the US and Japan, can strengthen its network effects there due to continued investment into expansion. At this stage, however it is too early to make this our base case.

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