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Chip Stocks Tank on Morgan Stanley's Soft NAND Price Outlook

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Several semiconductor stocks were hit yesterday after Morgan Stanley downgraded several memory chip makers on concerns of falling NAND prices and weak earnings growth projection for 2018.

Analyst Shawn Kim of Morgan Stanley noted that NAND flash memory chip prices are peaking but may start declining from the beginning of next year due to a supply glut. Notably, over the past year, NAND prices have been flaring up due to shortage of supply. Kim has a cautious stance as the supply-demand mismatch will diminish over the next few months. He further projects that there will be no material earnings growth for memory chip makers in 2018 due to fall in NAND prices.

Based on these projections, Morgan Stanley lowered its ratings for three semiconductor companies which have high exposure in the NAND memory-chip space — Western Digital Corp. (WDC - Free Report) , Samsung and Taiwan Semiconductor Manufacturing Company Ltd. (TSM - Free Report) . In a note to clients, Kim wrote, “We think now is the time to reduce exposure to NAND [flash memory] and Asian semiconductor names as the industry has benefited from sizable demand tailwinds and unprecedented pricing power, which we see reversing soon.”

He further stated, "Given our view of the cycle, we cannot recommend the sector until the market recognizes mounting pressure on NAND prices and slowing logic chip growth momentum in the near term… This reflects our negative view of prospects for the global memory industry, which is currently at a peak."

Semi Stocks Face the Brunt

The recent rating downgrade and comments on the future prospects of memory chips adversely impacted several chip makers, sending the companies’ shares to close in the red on Nov 27. The iShares PHLX Semiconductor ETF (SOXX - Free Report) , which represents the entire semiconductor performance, closed 1.3% lower yesterday.

Among stocks, Western Digital and Taiwan Semiconductor were the biggest losers — the companies’ shares plunging 6.7% and 4.4%, respectively. Chip equipment manufacturers like Lam Research (LRCX - Free Report) and Applied Materials (AMAT - Free Report) also took the punch, recording a decline of 2.7% and 1.7%, respectively.

Another memory-chip maker — Micron Technology (MU - Free Report) — also faced the brunt of the rating downgrade despite having little exposure to NAND. The stock lost approximately 3.3% of its value yesterday even after Morgan Stanley raised its target price. Also, Kim’s encouraging remarks on its main segment —DRAM — failed to boost its performance.

Kim noted that investors should not worry about Micron as the supply-demand dynamics for DRAM are still in favour of the company and price of DRAM will top-out in mid 2018. Morgan Stanley reiterated its overweight rating on the stock.

Cash in Your Investment Ahead of the Fall

Kim’s recent comments reflect that the industry is nearing end of the super cycle, where memory-chip makers have enjoyed a remarkable run til last Friday. Therefore, it is wise to cash in your investment before the stocks start tumbling drastically.

Citing Morgan Stanley’s analysis, Kim mentioned that investors should offload their holdings three to six months before the memory prices peak.

Memory-chip providers Western Digital, Taiwan Semiconductor and Micron Technology have rallied 27.4%, 42.8% and 119.2%, respectively, year to date. This implies that exiting here will generate a good return unless you may lose your money.

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