Recent supply chain conditions set up the semiconductor sector for substantial revenue in 2022 with much of the growth coming from substantial restocking by customers, according to an analyst at Morgan Stanley.
Here are the dominant themes for the sector in 2022, according to analyst Joseph Moore.
Supply Constraints To Remain Tight: Despite constraints easing, the supply chain is likely to remain very tight well into 2022, analyst Moore said in the note. Demand trends, though seeing a downtick, are still very robust, he added.
Automotive Chip Shortages Need to Ease Automotive chips could see material revenue upside in 2022 with potentially 30% growth compared to consensus expectations for 10% growth, the analyst said. For that growth to materialize, lead times should decline and availability should improve, he added.
Inventory build is likely to be less of a headwind in 2022 than people expect and other tailwinds such as content growth, EV mix shift, price increases and inventory restocking will more than offset any weakness, the analyst said.
"But for the industry to achieve outsized growth, we will need shortages to ease, which can pressure the narrative even as numbers rise," Moore said.
Trade Tension Should Lead to Increased Localization: Trade tensions between China and the U.S. should lead to a significant increase in localization, Moore said. Both U.S. and China are providing government incentives for domestic spending, the analyst noted.
Europe and Japan are also wanting to increase local semiconductor supply, he added.
Cautious Memory Market Outlook: Restocking for memory products comes with a certain amount of risk, given historic fluctuations and the large dollar amounts of inventory stored, Moore said. Customer inventories of DRAM are significantly elevated across PC, server and handset market, the analyst noted.
Pricing is expected to continue to fall in 2022 and it is less likely that memory fundamentals outperform, the analyst said.
Moore said he prefers NAND over DRAM, with Western Digital Corp WDC his preferred name due to the low valuation of its NAND business, its HDD remaining strong and low expectations for NAND.
Semiconductor Capital Equipment To See Growth: After an unusually strong wafer equipment spending market in 2021, incremental growth is likely in 2022, thanks to shipment catch-up, sustainable end-market demand, increasing process complexity and localization, and government support, Moore said.
"We expect WFE growth to be led by Foundry as those customers have announced plans for significant capex, and Memory to be only slightly up," the analyst said.
Lam Research Corporation LRCX, Applied Materials, Inc. AMAT, KLA Corp KLAC and Teradyne, Inc. TER will likely grow at or above the WFE market in 2022, Moore said.
The analyst said he has a preference for Lam Research, given low investor expectations, the opportunity for growth in Foundry/Logic and continued strength on the leading edge.
Cloud Semi Demand To Remain Strong: End market supply issues are less severe for data center chips than those witnessed by consumer end markets, Moore said. The data center end market should see a source of upside once shortages ease, as cloud demand proves durable for another year, he added.
Morgan Stanley said it continues to like Broadcom Inc.'s AVGO positioning in the market.
Global Smartphone Market To Remain Strong: Despite the maturation of 5G, Morgan Stanley expects the global smartphone market to remain strong. The firm models another year of double-digit sales growth for the handset semiconductor market.
After the initial ramp of 5G, the addition of incremental frequency bands, driven primarily by the proliferation of mmWave outside of the Apple Inc AAPL ecosystem as well as UWB, will likely be the next source of content growth, the firm added.
The firm recommends Qualcomm, Inc. QCOM, Broadcom and Qorvo Inc QRVO as ways to play the trend.
Numerous Growth Drivers To Remain Strong: EVs/ADAS, LiDAR, computer vision and SiC should all grow strongly in 2022, Moore said.
"While the market is still nascent, we anticipate the strong momentum from 2021 to carry into 2022," the analyst said.
Related Link: Why AMD Is Looking 'Solid' Into The Year-End
AI/ML Processing Edge And Metaverse: Artificial intelligence and machine learning will continue to be an increasingly significant portion of data center spend, Moore said.
Additionally, AI/ML applications are likely to permeate more into the physical world, the analyst said.
"Thus far, we have seen a meaningful number of product announcements for AI/ML edge use cases in both automotive, IoT and AR/VR applications that are expected to launch in volume over the next several years," the analyst wrote in the note.
Companies that intend to capture a portion of this opportunity include Nvidia Corporation NVDA, Ambarella Inc AMBA, Qualcomm, Intel Corporation INTC and Advanced Micro Devices, Inc. AMD, the analyst added.
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