Cloud semiconductor demand is unlikely to slow, and Overweight is maintained on Aspeed and Montage

Overview

This report focuses on the Greater China cloud semiconductor industry, with the core view that demand for CPU servers and GPU servers is unlikely to slow before 2027. Morgan Stanley believes that higher cloud capex, AI server platform migration, ASIC rack expansion, and upgrades in BMC and DRAM interface technology will continue to drive growth for companies such as Aspeed Technology and Montage Technology.

Core views

The report maintains a bullish view on cloud semiconductors: first, CPU server TAM continues to expand, with incremental growth from both Chinese and U.S. suppliers; second, GPU servers are being driven by scale-up systems, SuperPods, and multi-rack interconnect solutions; third, higher-spec products such as AST2700 BMC, traditional BMCs with software services, and third-generation DDR5 interfaces can support higher gross margins; fourth, upcoming cloud capex disclosures may be revised upward, which would mainly benefit memory but also send positive signals across the cloud semiconductor supply chain.

Analysis framework

The report combines on-site research at WAIC, cloud capex forecasts, CPU/GPU server shipment trends, ASIC rack TAM estimates, revisions to Aspeed financial forecasts, and risk-reward scenario valuation to assess revenue, margin, and valuation support for cloud semiconductor suppliers from 2026 to 2028.

Methodology notes

• Valuation methodsResidual income model

  Residual income model

  Aspeed's base-case target price uses the residual income model, with key assumptions including a 21.4% mid-term growth rate, a 5.5% terminal growth rate, an 85% cash payout ratio, and a 9.8% cost of equity.

• Scenario analysisRisk Reward Scenario

  Bull/base/bear target price

  The report provides bull/base/bear case valuations for Aspeed of NT$25,500, NT$20,888, and NT$10,000, respectively, to capture different outcomes for data center demand, share changes, margins, and new business progress.

• Market sizingASIC TAM Mapping

  AI ASIC rack TAM estimation

  The report estimates BMC demand and revenue contribution by ASIC platforms such as AWS Trainium, Google TPU, and Meta MTIA, and maps these to Aspeed's total revenue share.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Aspeed Technology (5274.TWO)

  Beneficiary of cloud server BMC and AI ASIC racks

  Strengths

  It has leading share in AI server BMCs, covering platforms such as NVIDIA, AMD, and Trainium; AST2700 and software-enabled BMC solutions help upgrade the product mix and sustain high gross margins.

  Weaknesses

  The AST2700 ramp in 2026 is slightly slower, and EPS is affected by stock dividends and changes in share capital; some shipments are constrained by T-glass shortages.

  Comparison

  The report believes it benefits from the triple expansion of CPU servers, GPU servers, and ASIC racks, with the target price implying a valuation multiple above the historical average.

  Risks

  Weakening cloud demand, slower-than-expected spec migration, intensifying competition, tighter China policy, and supply chain material shortages.

• Montage Technology Co Ltd (688008.SS)

  Beneficiary of DRAM interface technology migration and China's localization of data center semiconductors

  Strengths

  Benefits from cloud capex growth, DRAM interface upgrades, and the trend toward localization of data center semiconductors in China.

  Weaknesses

  The report discloses less detailed financial and valuation information than for Aspeed, and there are disclosures related to investment banking business and shareholdings.

  Comparison

  Compared with Aspeed, Montage is more tied to the memory interface and localization themes, while Aspeed is more directly tied to BMC and ASIC rack volume growth.

  Risks

  Cloud demand weaker than expected, slower-than-expected DRAM interface technology migration, and delays in new product launches.

• Greater China cloud semiconductor sector

  Supply chain mapping for AI server and cloud capex expansion

  Strengths

  Growth is jointly supported by CPU/GPU server TAM expansion, upward revisions to cloud capex, the spread of AI ASIC platforms, and specification upgrades.

  Weaknesses

  Some domestic AI GPUs are still constrained by wafer production and chip supply, creating uncertainty around the pace of supply chain expansion.

  Comparison

  Compared with traditional semiconductor cycles, this round of growth depends more on cloud vendor capex, AI training/inference demand, and server architecture upgrades.

  Risks

  Weakening macro environment, cloud capex below expectations, margin pressure from competition, and policy or supply chain restrictions.

Key data

• Cloud capexUS$916bn in 2026eCapex for the top 14 cloud vendors is projected at US$916 billion in 2026, up from US$476 billion in 2025.
• Capital intensityabove 31%Under stronger 2026 cloud capex expectations, overall capital intensity reaches a record high.
• Aspeed target priceNT$20,888Lowered from NT$23,456 to NT$20,888, mainly reflecting changes in 2026-2028e EPS and share capital changes caused by stock dividends.
• Aspeed EPS revision2026e -19%; 2027e -17%; 2028e -15%The EPS downgrade mainly comes from the impact of stock dividend issuance, while revenue forecasts were only lowered by 3% in 2026, raised by 1% in 2027, and raised by 3% in 2028.
• Aspeed 2026e revenueNT$17,866mnThe report forecasts 2026 revenue growth of 96.7% year over year, with gross margin of 69.0% and operating margin of 56.4%.
• ASIC rack revenue share2026e 9.7%; 2027e 21.1%The report expects ASIC racks to become an important source of growth for Aspeed in the coming years.
• AWS Trainium/Teton contribution2026e 5.0%; 2027e 5.1%AWS-related ASIC racks are expected to contribute about 5.0% and 5.1% of Aspeed's TAM revenue in 2026 and 2027, respectively.
• Aspeed valuation multiple77x 2027e EPS; 53x 2028e EPSThe report believes a forward P/E above the historical average can be supported by improving demand and incremental share gains.
• Montage valuation assumptions8.4% CoE; 19.3% mid-term growth rate; 4% terminal growth rateThe report believes these assumptions are supported by cloud capex growth, DRAM interface technology migration, and China's localization position in data center semiconductors.

Impact & implications

If the report's view plays out, the investment theme in the cloud semiconductor chain will expand from pure GPU growth to CPU servers, ASIC racks, BMC controllers, DRAM interfaces, and optical interconnect-related demand. Aspeed's key upside comes from BMC penetration in AI servers and ASIC racks, while Montage's upside comes from DRAM interface technology migration and China's localization of data center semiconductors.

Risks

• Weakening cloud demand or data center capex below expectations.
• Slower-than-expected server spec migration, affecting penetration of new solutions such as AST2700 and DDR5 interfaces.
• Intensifying competition putting pressure on pricing, market share, or operating margins.
• Further tightening of China policy or supply chain constraints affecting orders and shipments.
• Delays in new business or new product launches, leading to lower-than-expected revenue contribution.
• Domestic AI GPUs are constrained by wafer capacity and chip supply, which may affect the pace of GPU server expansion.

What to watch

• 2026 capex guidance from major cloud vendors and the magnitude of subsequent upward revisions.
• China CPU server orders, adoption of Hygon/AMD/Nvidia solutions, and pricing trends for high-end x86 CPUs.
• The pace of rollout in 2027 for GPU server scale-up systems, SuperPods, and multi-rack optical interconnect solutions.
• The speed of Aspeed AST2700 adoption in ASIC racks such as TPU, Trainium, and MTIA.
• Whether Aspeed completes E-glass certification and alleviates the shipment bottleneck caused by T-glass shortages.
• Montage's share performance in DRAM interface technology migration and China's localization of data center semiconductors.
• The impact of the Korean government investigation on sentiment toward Montage and timing of entry.