Morgan Stanley: Global slowdown in tech sector is inevitable

Morgan Stanley believes that a cyclical slowdown in the global technology sector is almost certain next year.

In a report issued on August 20, it said that it would be the result of a “potential reversal” in the rate of change in revenue growth and tight supply and demand conditions, according to “Al Arabiya”.

The bank said: “Certain sectors of technology – such as semiconductor materials and the artificial intelligence supply chain – may be severely affected in light of higher price volatility and operating leverage.”

However, it added that the effects are likely to be felt by all technology sectors.

According to Morgan Stanley, the semiconductor industry is at the end of an upward cycle, moving “from optimism to euphoria,” and the risk and reward are no longer attractive.

The bank said that chips were riding the AI ​​boom, but the next stage of AI trading “may not be that simple.”

“The key question is the ‘advancement’ of AI demand in 2025-26, as no one is discussing the near-term demand for [GPUs],” she added.

She predicted that over time, AI use-case applications will be more valuable than infrastructure.

“Despite the current shortage of AI computing chips, we need to remember that this is not a train that will continue forever — AI chips will eventually catch up with demand, becoming cyclical and more difficult to sustain at the current pace of gains,” Morgan Stanley wrote, predicting that top-line growth will start to slow down through 2025.

“It is always best to avoid overpaying for stocks late in the cycle, even if this does not allow us to time the peak precisely. Once the peak is past, it is like any other cycle,” the report concluded.

To prepare for such tech downturns, Morgan Stanley said, look for high-quality names with strong free cash flows, as well as stocks with cheap valuations. “Companies whose revenues have proven to hold up better during recessions have been more resilient than the technology sector and the broader market,” according to the report published by CNBC, and reviewed by Al Arabiya Business.

The bank said: “This also includes companies whose product demand is consistent and repeatable.”

Stocks

He added that many technology areas, as well as individual stocks, have a mix of defensive, countercyclical and growth opportunities that will help them outperform in a correction.

Morgan Stanley said: “Eventually the storm will pass and the traditional leaders – Samsung, TSMC and Apple, for example – will be at the forefront of the next tech growth curve.”

Here are the US stocks that Morgan Stanley still favors.

US Semiconductors

Nvidia has been the preferred stock for playing the AI ​​trade, but Morgan Stanley says it may be too early to pinpoint a top. Spending on AI remains resilient, and Nvidia is well positioned to monetize these investments at a higher rate than before, according to the bank.

“If the AI ​​cycle is coming to an end, we would favor Nvidia over its suppliers and competitors,” the bank said, explaining that the stock correction could be sharper for secondary components.

IT Hardware in the US

Historically, IT hardware bull cycles last four to six quarters, and the sector has strongly outperformed the S&P 500. Right now, the bank is only two to three quarters into the bull cycle, which could last for close to six quarters.

The bank’s preferred stocks in this area are Apple, Seagate and Dell.

Networking in the US

Morgan Stanley said that networking companies with exposure to AI could outperform, referring to a type of networking standard.

Networking in normal technical terms refers to a network of devices that can transmit and share information over physical or wireless connections. However, the requirements in AI are higher due to large language models and other AI applications that require very high bandwidth and low latency.

Arista Networks is best positioned to capitalize on this opportunity, calling it a “top performing networking name.”

Here are some of the global names Morgan Stanley listed as its “top fundamental picks.”

Samsung Electronics: The bank said the “qualitative rotation” that occurs during down cycles will begin to favor Samsung’s more defensive characteristics, such as earnings stability, over growth.

TSMC: Morgan Stanley favors TSMC’s “quality and defensive” nature during the semiconductor down cycle.

Quanta: The bank said the laptop maker has a strong balance sheet and generates strong cash flows, with growing exposure to data center AI infrastructure.