This morning, Morgan Stanley analyst Joseph Moore downgraded his semiconductor industry view to Cautious as he believes elevated inventory levels and stretched lead times leave “no margin for error,” while his colleague Craig Hettenbach cut On Semiconductor’s (ON) rating to Sell given the cyclical risks. Voicing similar concerns, Goldman Sachs analyst Mark Delaney downgraded Seagate Technology (STX) to Sell, saying that hard disk drives are at a cyclical peak, in part on incremental pressure from NAND oversupply.

‘NO MARGIN FOR ERROR’: In a research note this morning, Morgan Stanley’s Moore told investors that he has become less constructive on semiconductor stocks through the year and he now believes elevated inventory levels and stretched lead times leave the group with “no margin for error.” Given his view that any lead time adjustment or demand slowdown could drive a “meaningful correction,” Moore has downgraded his semiconductor industry view to Cautious from In-Line. Further, the analyst noted that deteriorating U.S./China trade relations likely prevent large scale M&A for now, serving to remove a previous tailwind to the group. Moore pointed out that he favors connector companies, like Amphenol (APH) and TE Connectivity (TEL), over analog/MCU at this point in the cycle, due to lower risk around lead time issues. He also has a “strong preference” for companies with high margins and more defensive models, such as Analog Devices (ADI), over lower margin and commodity exposed ones like Cypress Semiconductor (CY) and ON Semiconductor. Despite his more cautious view on the space, Moore reiterated Overweight ratings on Nvidia (NVDA), Xilinx (XLNX) and Ambarella (AMBA), arguing that they should benefit from secular growth in the area of Artificial Intelligence, data center, and autonomous.

MORGAN STANLEY SAYS SELL ON SEMI: In tandem with his firm’s semi industry downgrade to a cautious view, Morgan Stanley analyst Craig Hettenbach downgraded ON Semiconductor to Underweight from Equal Weight as he sees risks of an inventory correction by the fourth quarter, with a reduction in lead times serving as the catalyst. Additionally, the analyst pointed out that he believes On Semiconductor’s shares are more susceptible to multiple contraction following a period of strong outperformance in the stock. Hettenbach lowered his price target on the shares to $18.50 from $20.

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