Analysts name their top semiconductor stocks as the supply crunch eases

Published Fri, Apr 15 20222:15 AM EDTUpdated Fri, Apr 15 20222:25 AM EDT

Morgan Stanley , Deutsche Bank and more pick their top chip stocks to navigate evolving supply and demand dynamics in the sector. Semiconductors — a critical component of modern electronics — have wide-ranging applications in computing, health care, military systems, transportation, clean energy and beyond. The world has been experiencing a years-long chip shortage, largely on the back of supply chain disruptions from Covid and stimulus-driven demand. But Morgan Stanley's analysts say things are changing. "Our assessment suggests that supply chain disruption is easing as delivery times are falling and pricing power at foundries is eroding as tech demand has peaked," Morgan Stanley's analysts, led by Shawn Kim, said on Apr. 12. They estimate that less than 19% of the industry's end markets are currently facing supply constraints (now focussed largely in automotive and industrial), a sharp turnaround from more than 90% a year ago. On the other end, demand is also beginning to loosen up, according to Morgan Stanley, with the decline evident in consumer tech goods in the first quarter. The bank said this could quickly turn into an oversupply crisis — even as automakers continue to cut their production estimates amid chip shortages. "Tech demand has been considerably inflated by companies building inventory buffers, and we expect multiple quarters of inventory adjustment ahead, further exacerbated by worsening macro leading indicators," Kim said. Against this backdrop, Morgan Stanley said it prefers semiconductor companies with greater exposure to automakers and industrials. Its top picks include Arizona-based Microchip Technology as the "most likely beneficiary" of the ongoing supply chain situation, as well as Japan's Renesas and Taiwan Semiconductor Manufacturing Company. Read more Wall Street banks pick their top semiconductor stocks as electric vehicle production soars Goldman Sachs names its top global chip stocks — including one it says has upside of over 60% The outlook is murky for struggling chip stocks. Here’s where to find the best opportunities Other chip stocks Deutsche Bank, meanwhile, has said it is "surprised" at how pervasive the bearishness surrounding the semiconductor sector is. Investors are concerned about excess supply and demand weakening on the back of elevated geopolitical tensions, rising interest rates, and general recessionary fears, Deutsche's analysts, led by Ross Seymore, said on Apr. 10. Shares of the iShares Semiconductor ETF or SOXX , which tracks the performance of semiconductors, is down about 20% since the start of the year, reflecting the current risk-off sentiment in the once high-flying sector. Deutsche Bank said investors were focussed on names with desirable end market exposures or specific drivers — such as restructurings and product cycles — to unlock value. It noted that market participants appear more comfortable in chip stocks with exposure to infrastructure markets such as data center, networking, enterprise and 5G infrastructure. Within this space, Broadcom appears to be the "most popular name" given its infrastructure-heavy semi exposure, steady software business and strong cash returns, Seymore said. Investors also remain bullish on traditional "secular security blankets" such as Nvidia and Advanced Micro Devices for their long-term growth prospects, but are concerned about slowing growth, Seymore added. 'Sky is not falling' In addition, KeyBanc Capital said in a recent note that although the consumer picture looks weak, "the sky is not falling." "Our quarterly supply chain findings are mixed. While we are clearly seeing softness in consumer, PC, and smartphone end markets, and further supply/demand disruption related to the China Covid lockdowns, broader-based demand trends remain healthy, led by auto, cloud data center, and 5G infrastructure," analysts led by John Vinh wrote in a note on April 12. The investment bank's top picks are Broadcom, Marvell Technology and ON Semiconductor .

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Morgan Stanley, Deutsche Bank and more pick their top chip stocks to navigate evolving supply and demand dynamics in the sector.