At a time when the global chip shortage has not been alleviated, Morgan Stanley took the lead in sending out a "bearish" signal, causing the US chip stocks, which recently fell into a pullback, to receive another heavy blow.

In a report called Winter Is Coming on Thursday, Morgan Stanley analyst Joseph Moore wrote that the chip industry is entering the late stage of the cycle, when memory supply exceeds demand, and storage device manufacturers will face a difficult pricing environment next year.

Us chip stocks fell sharply. On Thursday, Micron Technology Inc, the largest u.s. maker of computer memory chips, fell as much as 8% in intraday trading before closing down 6.37% for the fourth day in a row. Seagate Technology (Seagate) is down 3.5 per cent and Intel Corp (Intel) is down 1 per cent.

The Philadelphia semiconductor index SOX fell 1.2% for six consecutive days, the longest losing streak since October 2018.

Samsung's south Korean shares opened lower on Friday, widening to 3.3% at one point, the biggest drop since Feb. 26.

Morgan Stanley: "the sell signal is accumulating."

In the above report, Morgan Stanley warned that a large amount of demand caused by the global chip shortage has begun to pullback, supply is catching up with demand, and the upward trend in prices may start to reverse next year, especially in the DRAM storage industry.

At present, JPMorgan's industry cycle indicators have shifted from "medium" to "late" for the first time since 2019, a change that has historically meant challenging long-term returns.

Morgan Stanley analyst Joseph Moore wrote in the report:

Initially we thought that as long as demand remained strong in the fourth quarter, prices were likely to continue to rise because supply exceeded production and helped to tighten inventories. However, while demand remains relatively strong, demand has deteriorated in recent weeks, leading to lower price expectations.

Before manufacturers raised prices, companies using DRAM had been building up their inventories, the analysis said. Some buyers are now delaying the purchase of DRAM because they think prices will fall in the coming months.

According to Morgan Stanley, preliminary signs show that although prices continue to rise in the third quarter, the pricing environment in the fourth quarter will be more challenging, and the price trend will be completely reversed in 2022.

As a result, Morgan Stanley lowered its expectations for the DRAM industry, and DRAM prices are expected to peak in the third quarter of this year and begin to show single-digit declines in the first quarter of next year. But as the chart below shows, cyclical declines tend to last for years, with DRAM contract prices falling by about 50 per cent in previous cycles.

However, Morgan Stanley believes that the upcoming downward cycle will be more moderate than in the past, the duration may be similar, but the decline in sales may not be so large.

The reason lies in the structural changes in the DRAM industry. On the supply side, industry consolidation has increased the threshold for external competitors, while on the demand side, it has shifted from the situation dominated by personal computers in the past to terminal products with more diverse and higher storage requirements, making the long-term growth prospects of related companies more diversified.

Morgan Stanley predicts that once earnings growth expectations are reversed, the industry's PB valuation may shrink by nearly 30%.. The actual situation could be worse, according to Morgan Stanley. It is common to see PB price-to-earnings ratios fall by 50-64 per cent during the transition to a downward cycle. In a downturn, DRAM shares typically fall 32-63 per cent from their peak, and the average share price has fallen 43 per cent in the past two downturns.So far, DRAM shares have pulled back 12% from their peak in April 2021.

Morgan Stanley warned that "sell signals are accumulating".

Morgan Stanley downgraded Micron to equal-weight from over-weight and lowered its target price to $75 from $105, 7 per cent higher than Thursday's closing price.

Morgan Stanley analyst Joseph Moore said in the report that Micron's business has improved, but because of the size of the company's DRAM business, its shares may bear the brunt of falling pricing.

It is understood that among the Wall Street analysts studying Micron's stock, 28 give the stock a "buy" rating, 6 a "hold" rating, and no sell rating, with an average target price of $115.

Morgan Stanley also downgraded SK Hynix from overweight to underweight, downgraded the target price of SK Hynix and Samsung, and downgraded the outlook rating of South Korea's technology industry to cautious from flat (In-Line).