Morgan Stanley names 2 chip stocks with 'significant upside' as China bans Micron

Published Wed, May 24 20237:08 PM EDTUpdated Thu, May 25 20235:11 AM EDT

Morgan Stanley identified two memory chip stocks with significant potential for growth as China bans chips made by Micron, a major U.S.-based memory chipmaker. The research report by the Wall Street bank predicts an upturn in the memory chip market, with supply and demand expected to balance out in the third quarter of the year and prices set to rise from the fourth. The investment bank's research indicates that supply and demand for Dynamic Random Access Memory (DRAM) will reach equilibrium soon, in light of sizable supply cuts and higher prices from mobile device manufacturers. DRAM is a type of semiconductor used to store data and is a critical chip used in laptops, mobile phones, servers and other electronic computing devices. Samsung Electronics is Morgan Stanley's "top pick," followed closely by SK Hynix . Shares of both South Korean companies are also traded in the United States and Europe. Shares of Samsung have risen by 10% from the December lows , and the consensus price target of analysts points toward a 16.8% upside potential from current levels. The stock, however, is still down by 10% from its two-year high. SMSD-GB 1Y line "The rates of change in both pricing and inventory are improving, and these have historically been key drivers of share price performance," said Morgan Stanley's equity analysts Shawn Kim and Duan Liu in a note to clients on May 21. "Samsung is our Top Pick but we believe SK Hynix will have pole position in the coming cycle growth curve given the significant bearish sentiment in the market towards it." Shares of SK Hynix are down by a fifth over the past two years, but the stock has rallied from its December 2022 low by 16%. The consensus price target of analysts point toward a further 14% upside from the current share price. The research report from Morgan Stanley came ahead of Beijing's announcement to bar some purchases of products from U.S. memory chipmaker Micron . Chinese authorities said earlier this week that Micron products failed the security review they began two months ago and cited "serious potential network security issues." Micron has said that only chips meant for use in networks and infrastructure will be restricted, while memory manufactured for computers and smartphones will be spared from the new rules. Samsung, SK Hynix and Micron are among a handful of companies that manufacture high-end memory chips. Morgan Stanley noted that peak multiples could rise by 85% to 145% from their current values for its two stock picks — and that's without taking into account any potential growth in artificial intelligence. The investment bank added that the market might be underestimating AI's influence on memory chips since the technology is still in an early stage of development, which could span decades rather than years. "The adoption of AI server usage will likely increase demand for all types of memory as AI servers have 2-3x higher memory content relative to traditional servers," the analysts said. "We see significant upside ahead and stay [overweight]." — CNBC's Michael Bloom contributed reporting.