Morgan Stanley: Chip Stocks Face Pricing Power Pressure, Valuations Already Stretched
Claire Weston
Morgan Stanley Wealth Management CIO Lisa Shalett warns the chip sector is significantly overbought on AI spending optimism, as hyperscalers build low-cost in-house chips that erode legacy chipmakers' pricing power.
Why are chip stocks called "overbought"?
Shalett labeled semiconductors "significantly overbought," citing chip-ETF flows and the Philadelphia Semiconductor Index (SOX).
The SOX price-to-earnings ratio has more than tripled since 2022. This means → share prices have far outrun actual earnings growth — a clear valuation-bubble signal.
In plain terms = chip stocks are priced as if AI profits are guaranteed, well before those profits have arrived.
How is pricing power being undermined?
Shalett noted that the AI data-center tech stack is being redesigned: hyperscale cloud providers — Amazon, Google, Microsoft — are increasingly building low-cost proprietary chips in-house.
She described a recurring industry pattern: when supply-chain bottlenecks let some memory-chip makers extract outsized margins, downstream engineers start hunting for cheaper alternatives.
This reflects a structural shift — cloud giants are moving from "chip buyers" to "chip competitors," squeezing legacy chipmakers' bargaining power from both sides.
What signal does Meta's move send?
Meta CEO Mark Zuckerberg said this week the company is considering leasing part of its AI infrastructure to outside users.
Shalett read this as a sign that big tech is starting to question massive capex: the market is now debating "the speed of return and the path to monetization."
This means → tech giants are no longer spending unconditionally — they are doing the math. Shalett's verdict: "We are in the early stages of a capex deceleration."
What does the SK Hynix listing reveal?
South Korean memory-chip maker SK Hynix listed on Nasdaq on Friday, raising $26.5 billion — the largest-ever U.S. IPO by a foreign company.
Yet its Korean-listed shares have fallen 26% from last month's peak, with sharp recent swings.
In plain terms = record fundraising shows capital is still pouring in, but the stock-price drop shows the market is already hesitating — exactly the tension Shalett flagged as "structural pricing-power pressure accumulating."
What comes next for the chip sector?
Shalett's core call: capital is still flowing heavily into chip trades, but the logic of pricing-power erosion is building.
The test is clear — whether chipmakers can keep delivering on earnings expectations will determine the sector's ability to hold current levels.
This means → if profit growth over the next few quarters falls short of stretched valuations, today's prices cannot hold.
Content is for reference only, not financial advice.