The demand for artificial intelligence (AI) semiconductor chips in Asia is driving an upgrade in chip stocks by Morgan Stanley. The brokerage firm is particularly bullish about chip stocks in Greater China, Japan, and South Korea, citing the long-term prospects for AI-linked semiconductors. According to a note from Morgan Stanley analysts, the combination of tech deflation and a growing demand for AI semiconductors will trigger the next logic semiconductor upcycle. The analysts highlighted that historically, a reduction in semiconductor inventory has been a strong signal for stock price appreciation.
In May, global sales data reported by the Semiconductor Industry Association showed signs of bottoming out, with revenue increasing 1.7% from April. This positive trend further supports Morgan Stanley’s upgrade of the chip sector in China to attractive from in-line, as well as its higher price targets for Samsung Electronics and SK Hynix in South Korea, and Japan’s chip sector, including Disco Corp.
Morgan Stanley previously upgraded some chip names in South Korea and Taiwan last October, and since then, chip gauges in both countries have surged by more than 27%. The rush of orders over the past two weeks for AI semiconductors has encouraged the firm to revise up earnings for players like Taiwan Semiconductor Manufacturing Co. and recommend that investors participate in a smartphone recovery. They also upgraded Will Semiconductor Co. to overweight.
In a separate note, Morgan Stanley analysts stated that Korea’s memory chipmakers are likely to benefit from the growth of the DRAM market, which is expected to increase nearly 10 times to $19 billion over the next four years. Their top pick in this space is SK Hynix.
It’s important to note that Morgan Stanley’s bullish view on chip stocks was stated before Samsung announced its worst quarterly revenue since at least 2009. However, the firm believes that EPS power expectations will be significantly raised in the coming years due to the emergence of high bandwidth memory and accelerating demand for AI servers.
By upgrading chip stocks in Asia, Morgan Stanley is recognizing the potential for long-term growth in the AI semiconductor market. As the demand for AI technology continues to increase, chip companies in Greater China, Japan, and South Korea are likely to benefit from this upward trend. The upgraded price targets reflect Morgan Stanley’s optimism about the future performance of these stocks. However, investors should closely monitor the sector and consider the potential risks associated with market volatility.
