Morgan Stanley’s Bold Signal on Semiconductor Stocks After Downturn

Semiconductor Stocks Face Pressure

Semiconductor stocks have experienced a significant downturn over the past month. The sector, as tracked by the iShares Semiconductor ETF (SOXX), has seen a drop of approximately 10%, driven by growing concerns among investors regarding valuations, demand trends, and the sustainability of recent gains.

On March 24, Alphabet’s Google (GOOGL) introduced TurboQuant, a new compression method that could reduce the memory required to run AI models by six times. This development led to a sell-off in memory-related stocks, with Micron (MU) and Sandisk (SNDK) each dropping more than 10% in the following days.

The recent decline in these stocks may appear to signal the beginning of a larger downturn. However, Morgan Stanley suggests otherwise. Here’s what the firm is observing.

Memory as the Bottleneck in AI Growth

Over the past two years, the focus of investors has largely been on GPUs from companies like Nvidia as the primary driver of AI growth. While this remains true, memory has now become the limiting factor in AI development.

In a March 26 research note sent to Jendela Magazine, Morgan Stanley argues that in a typical market cycle, a selloff reflects investors taking profits due to concerns about flat spot pricing, rising capital spending, and productivity gains.

“But this is anything but normal,” the analysts stated. “Memory is increasingly the bottleneck to AI builds (and agentic CPU builds), which appears durable.”

“We see the recent selloff as a healthy pricing in of durability concerns – capex, demand destruction, productivity, etc.,” the analysts wrote. They added that the strength of memory companies is “more durable than the market thinks, with memory supply remaining a gating factor for AI.”

Morgan Stanley maintains overweight ratings on memory names Micron and SanDisk, with price targets of $520 and $690, respectively.

What About Google’s TurboQuant?

Morgan Stanley believes that Google’s TurboQuant does not have the impact that many investors think it does. The firm notes that the reduction applies only to a specific part of memory, not overall usage. “They are just talking about KV Cache memory, not memory overall,” the firm said.

The KV cache is often held in high-bandwidth memory, whose contents are fixed and cannot change. More importantly, the improvement does not reduce the need for memory across AI systems.

“This is an evolutionary development, with basically no surprises for memory,” the analysts said. They added that improvements like compression have been an ongoing focus across the industry for years.

In fact, better efficiency could increase demand over time. As costs come down, companies can run larger and more advanced models.

Earnings Will Remain Strong

Morgan Stanley believes earnings for memory companies could remain elevated for several quarters, supported by strong pricing and limited supply growth.

“As AI evolves, we expect compute architectures to become more memory-intensive,” Micron’s CEO Sanjay Mehrotra said in the latest earnings call. “This is why we strongly believe that Micron is one of the biggest beneficiaries and enablers of AI.”

On March 18, Micron reported a record gross margin of 81% for the fiscal second quarter of 2026. Its revenue for the quarter reached $23.86 billion, almost tripled from a year earlier.

“We don’t think 81% gross margin is the new normal, but it’s also hard to see that getting worse in the next several quarters – perhaps even through the next two years,” Morgan Stanley wrote.

Micron stock is up 25% year-to-date despite this week’s tumble, closing at $357 on March 27.