Morgan Stanley: Short-term bearish on memory rather than AI chips, underweighting Micron but still overweighting TSMC

Amid the continued pressure in the semiconductor market, Morgan Stanley believes that the future of AI chips is bright, while memory chips need more time to wait for the market to recover.

On the 18th, Morgan Stanley analyst Charlie Chan released the latest research report, clearly stating optimism for AI chip-related companies, especially advanced foundries such as TSMC, and adopting a more cautious attitude towards memory chip-related companies, such as Korean semiconductor giant SK Hynix.

Morgan Stanley pointed out that AI is a key factor driving the growth of logic chips, which has shown a clear decoupling trend from the memory chip cycle. With the continuous development of AI technology, AI semiconductor companies are expected to perform well in future economic cycles.

At the same time, traditional memory, PC, and cloud computing-related companies may face greater pressure.

AI as the Driving Force for Logic Chip Growth

Morgan Stanley first pointed out that historically, the market cycles of logic chips and memory chips have been synchronous, but currently the two are gradually diverging in terms of cycles. The demand for logic chips (such as AI chips) is being driven by the rapid development of AI technology, while the memory market (such as DRAM) is in a relatively weak state due to supply-demand imbalances.

Morgan Stanley emphasized that AI technology is the main driving force behind the continuous growth of the logic chip market.

This structural growth undoubtedly comes from AI - the revenue growth of AI semiconductor supply chain companies remains strong, while non-AI companies are only experiencing a mild recovery.

Benefiting from the explosive growth of AI technology, advanced foundries like TSMC have performed well in inventory cycles and strong market demand. Morgan Stanley continues to give TSMC an "overweight" rating, believing that its strong AI chip orders and advanced process advantages will lead to continuous growth in the coming years.

With TSMC doubling the CoWoS production capacity of GPU and ASIC AI chips, revenue growth in the AI semiconductor supply chain will remain strong in 2025 and 2026. It is expected that revenue will grow at an average annual rate of 15%-20% over the next five years.

Specifically, the inventory days of logic chips continued to decline in the second quarter of 2024, indicating a gradual recovery in market demand. Especially for AI-related chips, benefiting from the deep penetration of AI technology into various industries, it has become a key driver of growth for the entire industry.

We still expect logic semiconductor companies with a long-term AI trend (such as TSMC) to overcome cyclical trends, as EPS estimates continue to trend upwards.

Morgan Stanley stated that TSMC's layout in the AI chip field can not only help maintain its revenue growth but also provide stock price protection when potentially entering a downturn cycle for memory and logic semiconductors in the next few quarters. The future target price for TSMC is 1220 New Taiwan Dollars per share, with the current stock price at 973 New Taiwan Dollars, representing an increase of approximately 25%

Challenges in the Storage Industry

In contrast, the storage market faces more challenges.

Morgan Stanley pointed out that the storage industry is being affected by oversupply and price declines, especially with more competitors entering the DRAM market, leading to intense industry competition and entering a downturn cycle.

Morgan Stanley specifically mentioned that storage companies like SK Hynix will face greater pressure, with a less optimistic outlook. Morgan Stanley has a "underweight" rating on storage giant SK Hynix, believing that its performance growth will be squeezed by competition from China and Samsung.

Finally, the report looked at the future trends in the semiconductor market for the next few years. Morgan Stanley believes that the growth of AI chips will help logic chip companies break through cyclical limitations, while the storage industry will require a longer adjustment period.

Looking ahead, we believe that leading chip foundry supplier TSMC can maintain strong revenue growth of an average of 26% over the next four quarters. Other companies may experience growth slowdowns; we expect the average year-on-year growth during the same period to be only 2%.

In a research report released the day before, Morgan Stanley "halved" SK Hynix's target price, directly reducing it from 260,000 Korean won to 120,000 Korean won