Morgan Stanley became the latest brokerage to opine that the selloff in semiconductor and semiconductor-equipment shares has gone too far, raising its investment rating on both sectors to attractive and proposing a handful of names as near-term buys. Both calls rested on the thesis that chip demand remains brisk. "We believe the semiconductor industry is in the sweet spot of the cycle, and although valuations are relatively high, our attractive industry view reflects our belief that solid increases in earnings power and positive surprise potential should support higher stock prices," Morgan Stanley wrote in the semiconductor note. "We also point out that semiconductor stocks generally outperform the stock market when interest rates rise, which should occur in 2005," the brokerage added. Among specific names, Morgan Stanley pointed investors toward stocks it currently rates as overweight, which include Intel ( INTC), Broadcom ( BRCM), National Semiconductor ( NSM) and Nvidia ( NVDA). The brokerage also said the Philadelphia Semiconductor Index "has upside potential to 600-650 this year, and 450-475 should offer solid support." The index closed Wednesday at 487.
In the semiconductor-equipment space, Morgan argued the market is too gloomy about business prospects. "Looking over the past month, semiconductor equipment shares have seen on average a 20%-25% decline in prices. We believe that a lot of the price correction was based on what investors perceived to be a possible decline in bookings growth rate in the second quarter, and fear of a lack of sustainability into the year's second half," it wrote. "While these fears were legitimate as many of the Asian chipmakers placed large orders in the fourth quarter of 2003 and first quarter of 2004, we now see a continuation of the growth into the second quarter and beyond as demand for chips remains robust and both DRAM and logic fabs are capacity constrained currently." The brokerage named Staktek ( STAK) and LTX ( LTXX) as its current favorite names in the sector. Morgan Stanley does investment banking or will seek it from most of the major names in the semiconductor and equipment sectors.