Morgan Stanley says a huge sell-off in semiconductor stocks this year has created an opportunity for a dip, naming two global chip makers it expects to dominate. Semiconductor stocks have tumbled this year amid widespread selling in the tech sector. But Morgan Stanley believes it has created an opportunity to invest in some of the “highest quality” and “most influential” global semiconductor companies at attractive prices. In a note from May 20 titled “Clash of Chips”, analysts at the bank led by Sean Kim noted that there are three major producers today: Taiwan Semiconductor Manufacturing Company, Samsung and Intel. In fact, he said the investment and operational excellence required to apply the most advanced process technologies to semiconductor chips has driven all but these three companies out of the industry. “On the leading edge, we expect TSMC and Samsung to dominate advanced semiconductor manufacturing over the next decade, capitalizing on the large and rapidly growing foundry opportunity,” Kim said. Intel’s role is “less certain,” he said. TSMC and Samsung are the only two companies that operate foundries for manufacturing leading-edge semiconductors, and count the likes of Apple, Qualcomm and Nvidia among their biggest customers. Shares of both TSMC and Samsung are down about 15% over the past year, outperforming the iShares Semiconductor ETF, which is down more than 26% over the same period. The demand for leading-edge semiconductors – the smallest and most powerful chips – is booming as innovations in areas such as cloud computing, artificial intelligence (AI), smart vehicles and 5G take-off continue to grow. The bank predicts chip demand from high-performance computing, which includes cloud and AI, to meet smartphone-to-chip demand within a few years. TSMC “TSMC as a pure play foundry is a leading player in global semiconductors – and now dominates in leading-edge semiconductor manufacturing in terms of technology and market share,” Kim said. According to Morgan Stanley, the company runs the largest semiconductor foundry in the world, has “formidable” customers and is a “key enabler” for many tech megatrends. Fundamentals also suggest better earnings growth at TSMC, the bank said. According to Morgan Stanley, the company delivered annual sales growth of 10% between 2015 and 2020, compared to 7% at Samsung. 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’s $1.4 trillion total market opportunity is “understated and underestimated”. Kim estimates that Samsung’s operating margin will hold steady at around 20% in 2024, with the company generating “massive amounts” of free cash flow of about $30 billion in 2023. Morgan Stanley’s price target on TSMC represents a potential increase of 50%. May 24, while the bank’s price target of 85,000 KRW ($67.30) on Samsung represents 27.8% upside potential. Its analysts have overweight ratings on both the stocks.
Semiconductors are seen on a circuit board.
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Morgan Stanley says a huge sell-off in semiconductor stocks this year has created an opportunity for a dip, naming two global chip makers it expects to dominate.
