The cyclical bottom is in sight for the semiconductor industry

Morgan Stanley has moved its industry view on Semiconductors from In-Line to Attractive, adjusting its ratings on three stocks in the sector in a note this week.

The firm upgraded shares of Qorvo (NASDAQ:) to Overweight from Equal Weight and lowered Qualcomm (NASDAQ:) and Lam Research (NASDAQ:) to Equal Weight from Overweight.

Analysts at the firm see a bottoming process for the broad markets in the first half of 2024. “Our fundamental view is turning more positive on the device side as the inventory correction runs its course,” analysts wrote.

“Generally speaking, barring macro dislocation, we are past the bottom in some areas, and for most others, the bottom is in sight. Barring economic
dislocation, things should improve over the course of 2024,” they added, noting that the next upturn “will face some significant challenges that cap upside returns in the aggregate.”

QRVO, which was assigned a price target of $34, up from $120, has the most attractive catalysts out of the firm’s smartphone names, with the momentum from a China Android snapback and content gains from the 5G transition potentially driving revenue growth and expanding gross margins.

The QCOM price target was raised to $132 from $119 per share, with Morgan Stanley downgrading the stock after it hit its price target. Analysts also noted that Qualcomm’s strong execution in the last two to three years has resulted in stronger-than-normal market share and pricing, which “creates a tough bar going forward.”

LAM also hit the firm’s price target and was downgraded as a result. Morgan Stanley sees limited upside for the company’s shares from here.

“Our previous OW thesis on LAM was that a higher portion of their business is at trough levels – mostly NAND – and that there should be mean reversion at the revenue level vs. peers in 2024. We still see that this way, but the mean reversion is less compelling when it was the best-performing stock in 2023,” analysts explained.