A “recovery narrative” has been playing out in a corner of the semiconductor market this year, according to Morgan Stanley. That’s the memory sector, which includes DRAM, or dynamic random access memory — a type of semiconductor memory needed for data-processing — and NAND, another type of memory that stays viable without a power source. “The memory sector has been on a cycle recovery narrative this year – and typical of that the first phase, it is all multiple expansion, and front-running a lot of good things that are supposed to happen,” Morgan Stanley analysts said in a Sept. 7 note. “On the earnings front, that is clearly playing out for AI/[high bandwidth memory] driven stocks and we now expect NAND upside to drive a further leg of revisions.” High bandwidth memory (HBM) is a segment in the DRAM sector and is a key component needed to run advanced processors that regular DRAM cannot. Analysts have been optimistic on this segment this year as the artificial intelligence buzz has shone the spotlight on advanced processors that are needed for AI applications. ‘Preferred plays’ and ‘least favored’ Valuations are justified by the growth and duration of earnings, the bank said. It said South Korean chipmaker SK Hynix , U.S. firm Western Digital Corporation , and Taiwanese firms Winbond and Phison are its “preferred plays.” They benefit from NAND recovery on cash flows, and a “strong competitive position” in high bandwidth memory, said the bank. Meanwhile, the potential for NAND improvement in the U.S. seems “most positive” for Western Digital, which isn’t discounting a material recovery in NAND profits, Morgan Stanley said. But, it added, “We would be conservative on the next 2-3 years peak earnings potential, as the markets remain meaningfully oversupplied, as a return to positive gross margins should lead to restart of idled capacity.” SK Hynix and Samsung would be key beneficiaries of high bandwidth memory demand from the artificial intelligence trend, the bank said. “From Hynix’s perspective, even with the stock rallying, the visibility into the company building a solid position in AI keeps us solidly [overweight]. The company is the most material beneficiary of the surge in AI spending which is now underway, and has one of the best idiosyncratic growth among our Asia tech coverage,” Morgan Stanley analysts wrote. “For HBM, we believe Hynix will maintain its pole position in the AI cycle growth curve,” they added. The bank said its “least favored” stocks are Micron , Macronix and GigaDevice. Improving conditions Morgan Stanley said it’s become more optimistic on the memory sector given that pricing and inventory conditions are improving further. The bank added that NAND has benefited from Samsung’s supply cuts, “with instances of double-digit price increases for September delivery.” “While pricing power could be temporary given oversupplied market conditions, a change in pricing could lead to a change in customer inventory behavior when cycle conditions are bottoming,” it said. Inventory for DRAM chips is also “tracking down meaningfully” from the third quarter this year, the bank said. “We advise using weak periods in the market to build and use time in the market to take advantage,” it added. Overall, Morgan Stanley expects a shortage building up in the fourth quarter and an upturn in 2024 — before peaking in 2025. “The industry continues to produce well below actual demand, and we can get some comfort that the recovery should sustain well into 2025.” — CNBC’s Michael Bloom contributed to this report.
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