Morgan Stanley is bullish on the 2Q26 analog semiconductor recovery, with STMicroelectronics as its top pick this quarter

Overview

This report is Morgan Stanley's quarterly global analog semiconductor investment playbook, focusing on the key debates ahead of the 2Q26 earnings season: whether order improvement is coming from inventory replenishment or from accelerating real end demand, and how changes in 800V and data center power architectures will affect the deployment pace of power semiconductors. The report's overall view is constructive, believing that analog semiconductors are entering the early stage of a more durable earnings recovery.

Core views

The core views include: first, channel inventory remains lean, price pressure is easing, order cancellations are limited, and customer order visibility is extending, indicating that demand improvement is more real than speculative restocking. Second, although Nvidia's Kyber rack architecture replacement has raised concerns about the pace of 800V deployment, sidecar power systems can be introduced independently at lower voltages and are expected to begin shipping from 3Q26, thereby limiting downside risk to server rack models. Third, STMicroelectronics, due to its exposure to optical networking, PIC100, silicon photonics, and LEO satellite businesses, is seen as the company most likely to deliver upside earnings surprise this quarter.

Analysis framework

The report combines a global analog semiconductor model, channel checks, inventory tracking, server rack power models, and a sum-of-the-parts valuation framework to compare major analog semiconductor companies in terms of revenue, automotive and industrial revenue, gross margin, inventory, free cash flow, ROIC, and valuation metrics, while assessing cyclical recovery separately from structural growth opportunities.

Methodology notes

• Industry cycle analysisGlobal analog semiconductor model

  Cross-sectional comparison of revenue, gross margin, inventory, free cash flow, and valuation

  This model is used to track indicators such as revenue recovery, margin expansion, inventory digestion, free cash flow, and ROIC across global analog semiconductor companies to identify early signals of an upward cycle.

• Channel and inventory validationInventory tracking and channel checks

  Distinguishing restocking from real demand acceleration

  The report assesses the quality of demand improvement through distributor inventory, manufacturer inventory, end inventory, price discipline, order cancellations, and customer order visibility.

• Product and architecture analysisServer rack power model

  Power semiconductor content rises with rack architecture

  The report tracks changes in power semiconductor content from Rubin to Feynman racks and evaluates the impact of the Kyber replacement and sidecar power systems on the deployment pace from 2027 to 2028.

• Valuation methodSum-of-the-parts valuation

  Different P/E multiples applied to cyclical businesses and structural growth businesses

  For STMicroelectronics, the report values the core cyclical business at 18x P/E and the optical networking and LEO businesses at 36x P/E to reflect their structural growth potential.

Asset mapping & comparison

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

• STMicroelectronics NV (STMPA.PA)

  Top analog semiconductor pick this quarter, rated Overweight with a target price of €78 in the report.

  Strengths

  Optical networking, PIC100, silicon photonics, and LEO businesses provide structural growth; cyclical businesses benefit from a recovery in industrial and automotive demand; lower underutilization charges help gross margin recovery.

  Weaknesses

  Still affected by automotive and industrial cycles, and the recovery pace in traditional businesses may be uneven.

  Comparison

  Compared with traditional cyclical analog semiconductor businesses, STMicroelectronics' optical networking and LEO businesses are assigned higher valuation multiples.

  Risks

  PIC100 ramp below expectations, fluctuations in data center customer order timing, slower-than-expected industrial and automotive recovery, and multiple compression.

• Infineon Technologies AG (IFXGn.DE)

  A key beneficiary of changes in data center power semiconductor deployment and server rack power architecture.

  Strengths

  The report expects it to reiterate FY26 €1.5bn and FY27 €2.5bn data center revenue guidance, while the economics of power semiconductor $/kW improve.

  Weaknesses

  The market has concerns about the deployment pace related to 800V and the Kyber architecture replacement.

  Comparison

  Compared with STMicroelectronics, which is more geared to optical networking and LEO, Infineon has more direct exposure to data center power and rising power semiconductor content.

  Risks

  Deployment delays caused by the Kyber replacement, slower-than-expected shipment pace of sidecar power systems, and unsustainable pricing improvement.

• Global analog semiconductor sector

  The report believes the sector is entering the early stage of cyclical recovery, with 2Q26 earnings likely to remain above seasonal levels.

  Strengths

  Low channel inventory, gradual restocking, easing price pressure, higher factory utilization, and lower underutilization charges.

  Weaknesses

  Analog/MCU inventory is still above the historical median, end inventory is uneven, and the recovery may be gradual rather than V-shaped.

  Comparison

  Improving industrial and power semiconductor demand is seen as a stronger driver, while automotive growth remains relatively more moderate in structural terms.

  Risks

  If order improvement proves to be only short-term restocking, the sustainability of the sector's earnings recovery will be questioned.

• NVIDIA Corp. (NVDA.O) / Kyber rack architecture

  Nvidia's architecture changes affect market expectations for the pace of 800V and data center power semiconductor deployment.

  Strengths

  AI server rack upgrades still increase power complexity and power semiconductor content.

  Weaknesses

  The Kyber architecture replacement has raised investor concerns about the deployment pace in 2027 to 2028.

  Comparison

  The report believes sidecar power systems can be introduced independently of Kyber at lower voltages, so the negative impact on the power semiconductor chain is limited.

  Risks

  If the architecture replacement leads to broader design changes, it could delay confirmation of power semiconductor orders.

Key data

• STMicroelectronics rating and target priceOverweight; PT €78The report calls STMicroelectronics its top analog semiconductor stock pick this quarter.
• STMicroelectronics current price€62.00The disclosed table price date is 2026-07-10.
• Implied upside for STMicroelectronicsapproximately 25.8%Calculated based on the €78 target price and the €62.00 current price.
• STMicroelectronics FY26 automotive and industrial growthautomotive +9% yy; industrial +30% yyThe report estimates a recovery in FY26 automotive and industrial segments.
• STMicroelectronics data center revenueFY26 to FY28 CAGR 77%; above $3bn in FY28Growth mainly comes from opportunities in optical networking, PIC100, and silicon photonics.
• STMicroelectronics LEO revenueFY26 $815mn; FY28 $1.8bnThe report believes LEO is a high-margin, multi-year structural growth opportunity.
• Infineon data center revenue guidanceFY26 €1.5bn; FY27 €2.5bnThe report expects the company to at least reiterate this guidance.
• Power semiconductor contentRubin $128/kW; Feynman $191/kWManagement last mentioned average data center power semiconductor content of $175/kW.
• Inventory trackingDistributor DOI down 2 days qoq; Analog/MCU inventory down 2 days qoqHowever, Analog/MCU inventory remains above the historical median of 45 days, so the recovery is expected to be more gradual rather than V-shaped.
• Recent STMicroelectronics earnings baselineQ1 sales $3.1bn, GM 33.8%; Q2 sales guidance $3.45bn, +11.6% qoqManagement mentioned lower underutilization charges, improved order visibility, and a book-to-bill ratio above 1.

Impact & implications

If the report's view proves correct, the investment narrative for the analog semiconductor sector will shift from simple inventory repair to earnings recovery and structurally higher data center content. The re-rating potential for STMicroelectronics comes from a higher contribution from optical networking and LEO businesses as well as gross margin improvement; for Infineon, the key is whether the market regains confidence that data center power semiconductor deployment has not been materially impaired by changes in the Kyber architecture.

Risks

• There are execution and timing mismatch risks around the pace of 800V adoption and the Kyber architecture replacement.
• Order improvement may partly come from advance ordering or restocking rather than entirely from accelerating end demand.
• Analog/MCU inventory remains 45 days above the historical median, and inventory correction has not yet fully ended.
• Industrial customers and machinery OEM inventories remain high, and end-market recovery may be uneven.
• If STMicroelectronics' PIC100, optical networking, and LEO revenue ramp comes in below expectations, it may weaken the earnings upgrade thesis.
• Morgan Stanley discloses investment banking or other business relationships with multiple covered companies, and investors should treat this report as only one input in decision-making.

What to watch

• Whether 2Q26 guidance from analog semiconductor companies continues to come in above seasonal levels.
• Management commentary on order quality, price discipline, cancellation rates, and customer order visibility.
• Whether Infineon reiterates its FY26 €1.5bn and FY27 €2.5bn data center sales guidance.
• Whether sidecar power systems begin shipping from 3Q26 as expected.
• When STMicroelectronics reports 2Q26 earnings on 2026-07-23, whether full-year revenue and margin guidance is raised.
• Whether orders for PIC100, silicon photonics, optical engines, and AI data center optical networking continue to accelerate.
• The revenue ramp of the LEO satellite business and progress in customer diversification.
• Whether Analog/MCU inventory days continue to decline and whether end industrial and automotive inventories normalize further.