Morgan Stanley reveals the two chip stocks it says will dominate over the next decade

Published Tue, May 24 20227:54 PM EDT

A massive sell-off in semiconductor stocks this year has created an opportunity to buy the dip, Morgan Stanley says, naming the two global chipmakers it expects to dominate. Semiconductor stocks have taken a beating this year, amid a broader sell-off across the tech sector. But Morgan Stanley believes this has created an opportunity to invest in some of the "highest quality" and "most dominant" global semiconductor companies at attractive prices. In a note titled "Clash of Chips" from May 20, the bank's analysts, led by Shawn Kim, noted that there are three major producers today: Taiwan Semiconductor Manufacturing Company , Samsung , and Intel . Indeed, they said the investment and operational excellence required to implement the most advanced process technologies for semiconductor chips has driven out all but these three companies from the industry. "At the leading edge, we expect TSMC and Samsung to continue to dominate advanced semiconductor manufacturing in the next decade, capitalizing on the large and rapidly growing foundry opportunity," Kim said. Intel's role is "less certain," he added. TSMC and Samsung are the only two companies operating foundries for the fabrication of leading-edge semiconductors, and count the likes of Apple , Qualcomm and Nvidia among their biggest customers. Both TSMC and Samsung shares are down around 15% over the year to date, outperforming the iShares Semiconductor ETF , which is down more than 26% over the same period. Demand for leading-edge semiconductors – the smallest and most powerful chips – has been booming as innovation in areas such as cloud computing, artificial intelligence (AI), smart vehicles, and 5G takes off. The bank predicts chip demand from high-performance computing, which includes cloud and AI, to match chip demand from smartphones within a few years. TSMC "TSMC is a leading player in global semiconductors as a pure play foundry – and is now dominating in leading edge semiconductor manufacturing in terms of technology and market share," Kim said. The company runs the largest semiconductor foundry in the world, has "formidable" customers and is a "key enabler" for multiple tech megatrends, according to Morgan Stanley. Fundamentals also suggest superior earnings growth at TSMC, the bank said. The company delivered compounded annual sales growth of 10% between 2015 to 2020, compared to 7% at Samsung, according to Morgan Stanley. This is expected to continue into 2023, with TSMC expected to grow sales at a compounded rate of 22%, compared to 15% for Samsung. Samsung Morgan Stanley noted that Samsung's vertical and horizontal integration gives it a "unique edge" and added that the company has an "underpenetrated and underestimated" total market opportunity of $1.4 trillion. Kim estimates that Samsung's operating margins will remain stable at around 20% into 2024, with the company generating "massive amounts" of free cash flow of around $30 billion into 2023. Morgan Stanley's price target on TSMC represents a potential upside of 50% as of May 24, while the bank's price target of 85,000 Korean won ($67.30) on Samsung represents a 27.8% upside potential. Its analysts are overweight-rated on both stocks.

Justin Sullivan | Getty Images

A massive sell-off in semiconductor stocks this year has created an opportunity to buy the dip, Morgan Stanley says, naming the two global chipmakers it expects to dominate.