Investing.com -- Morgan Stanley (NYSE:MS) analysts tempered expectations for the automotive semiconductor market, saying in a note on Friday that they see a period of stagnation due to inventory destocking, pricing pressure, and slower content growth across both battery electric vehicles (BEVs) and internal combustion engine (ICE (NYSE:ICE)) vehicles.
"Auto semis are entering a period of stagnation due to inventory destocking, ASP pressure, and slower content growth," Morgan Stanley wrote, revising down their 2024 forecast for the auto semiconductor market from $78.0 billion to $75.3 billion, representing a 3% year-over-year decline.
The bank introduced a flat growth forecast for 2025 at $75.3 billion, emphasizing that the recovery once expected in the auto chip sector is now looking increasingly uncertain.
They see three key headwinds emerging for the auto chip market: continued inventory destocking as suppliers maintain "safety inventory" for the industry, a reversal of favorable pricing trends seen in 2022-23, and a slowdown in semiconductor content growth per vehicle, largely driven by intensifying competition among automakers and affordability concerns for consumers.
Morgan Stanley also foresees semiconductor suppliers scaling back their expectations for 2025, moving from hopes of a robust recovery year to what may be a "slight recovery" or "no recovery" at all.
The firm anticipates lower demand and more bearish pricing trends to weigh on the industry.
"Auto semi outperformance is unlikely any time soon," the analysts warned, pointing to underperformance of auto chip stocks since December 2023 due to market weakness and cyclical headwinds.
Morgan Stanley remains cautious on names with potential pricing risks, such as ON Semiconductor (NASDAQ:ON), Navitas Semiconductor Corp (NASDAQ:NVTS) and Wolfspeed (NYSE:WOLF), while favoring Analog Devices (NASDAQ:ADI) for its stronger industrial exposure and relatively insulated automotive business.