Semiconductor shares have come beneath strain. Over the previous month, the sector tracked by the iShares Semiconductor ETF (SOXX) has dropped roughly 10%, as traders develop cautious about valuations, demand developments, and the sustainability of latest features.
On March 24, Alphabet’s Google (GOOGL) rolled out TurboQuant, a brand new compression technique that would cut back the quantity of reminiscence required to run AI fashions by 6x, inflicting a sell-off in reminiscence names, with Micron (MU) and Sandisk (SNDK) down greater than 10% within the days following the information.
The latest pullback in these shares could appear to be the beginning of a much bigger downturn. However Morgan Stanley says it isn’t. Here is what the agency sees.
Reminiscence is now the bottleneck in AI progress
Over the previous two years, traders have centered on GPUs from firms like Nvidia as the important thing driver of AI progress. That’s nonetheless true. However reminiscence is now the limiting issue.
In a March 26 analysis be aware despatched to TheStreet, Morgan Stanley argues that in a traditional cycle, a selloff displays traders taking income on considerations about flat spot pricing, rising capital spending, and productiveness features.
“But this is anything but normal,” the analysts mentioned. “Memory is a bottleneck, increasingly the bottleneck, to AI builds (and agentic CPU builds), which appears durable.”
Micron inventory is up 25% year-to-date regardless of this week’s tumble, closing at $357 on March 27.
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“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 power of reminiscence firms 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 says Google’s TurboQuant does not have the effect investors think it does.
The firm notes the reduction applies only to a specific part of memory, not overall usage. “They’re simply speaking about KV Cache reminiscence, not reminiscence general,” the firm said.
The KV cache is often held in high-bandwidth memory, whose contents are fixed and cannot change.
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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.
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Google itself has tested much larger context windows for its Gemini models but held back in part due to cost constraints.
Morgan Stanley’s takeaway is that TurboQuant is more about enabling capability than cutting demand.
“Result – shortages are intensifying and customers are prepaying for large volume deals given conviction that these shortages will be sustainable,” the analysts wrote.
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.”
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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 do not assume 81% gross margin is the brand new regular, however it’s additionally exhausting to see that getting worse within the subsequent a number of quarters – maybe even by way of the following two years,” Morgan Stanley wrote.
Micron stock is up 25% year-to-date despite this week’s tumble, closing at $357 on March 27.
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