Semiconductor inventories are improving, but a broad restocking cycle has not yet begun

Overview

This report is Morgan Stanley's quarterly tracking of North American semiconductor supply chain inventories. The core conclusion is that inventories increased quarter over quarter but by less than seasonal norms, supply chain discipline remains intact, and broad restocking has not yet appeared. Customer inventories were roughly in line with seasonality, distributors continued reducing DOI, and producer restocking was also below seasonal levels.

Core views

The report believes inventory trends are improving in a healthier direction, but the industry has not yet entered a full restocking phase. Total supply chain DOI remains 33 days above the historical median, indicating that absolute inventory pressure has not been fully absorbed. Distributor destocking and restrained producer restocking are the main sources of improvement, while customer inventories are diverging by end market, with communications, ODM, compute/mobile, and some smartphone-related areas seeing faster DOI increases.

Analysis framework

The report uses DOI, inventory value, COGS growth, quarter-over-quarter changes, year-over-year changes, deviation from historical medians, and seasonal benchmarks to assess semiconductor supply chain inventories. It breaks the supply chain into three layers—customers, distributors, and producers—and further analyzes them by end market and semiconductor sub-industry.

Methodology notes

• Inventory CycleSupply Chain DOI Analysis

  Use days of inventory to measure supply chain inventory pressure

  By comparing current DOI with the historical median, the prior quarter, and the first-quarter seasonal increase, the report determines whether inventory reflects normal seasonal accumulation, ongoing destocking, or entry into a restocking phase.

• Supply Chain SegmentationCustomer-Distributor-Producer Breakdown

  Break down inventory pressure across different points in the supply chain

  Customer inventory reflects end demand and downstream stocking, distributor inventory reflects channel health, and producer inventory reflects upstream capacity and shipment cadence; together, the three are used to judge whether the industry is seeing broad restocking.

• Relative Industry ViewMorgan Stanley Industry View

  Assess industry attractiveness versus the benchmark over 12-18 months

  Attractive means the analyst expects the coverage universe to deliver attractive performance relative to the relevant market benchmark over the next 12-18 months; In-Line means performance is expected to be broadly in line with the benchmark.

Asset mapping & comparison

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

• ADI / NXP

  Preferred direction: high-end analog exposure

  Strengths

  The report believes supply-demand conditions are tightening for high-end analog exposure or that inventory risk there is more defensible.

  Weaknesses

  Analog/MCU DOI declined quarter over quarter but remains 45 days above the historical median, leaving absolute inventories elevated.

  Comparison

  Compared with distributor destocking, inventory pressure remains more pronounced on the analog producer side.

  Risks

  If industrial, automotive, or communications demand recovers slowly, the destocking period could be prolonged.

• NVDA / AVGO / CBRS

  Preferred direction: compute- and network-related companies

  Strengths

  Compute, mobile, and network-related areas benefit from structural demand, and the report lists them as areas where supply-demand is tightening or inventory risk is relatively defensible.

  Weaknesses

  Compute/mobile customer DOI increased by 11 days quarter over quarter, and some related producer DOI metrics remain above historical levels.

  Comparison

  Relative to traditional cyclicals, compute- and network-related assets have stronger support from structural growth.

  Risks

  If end demand or data center capex slows, inventory improvement could reverse again.

• MU / SNDK

  Preferred direction: memory

  Strengths

  The report includes memory-related companies on its preferred list, and customer-side Storage DOI is slightly below the historical median.

  Weaknesses

  Producer-side Memory DOI was broadly flat and remains 8 days above the historical median.

  Comparison

  Customer-side inventory positioning in memory is better than in most customer end markets, but the producer side has not yet fully returned to historical balance.

  Risks

  Price cycles, demand volatility, and renewed inventory accumulation could affect earnings leverage.

• MKSI / KLAC / LRCX / ONTO

  Preferred direction: semiconductor capital equipment

  Strengths

  Semi Cap Equipment DOI declined by 6 days quarter over quarter, showing clear improvement in inventory trends.

  Weaknesses

  The industry view remains In-Line, and DOI is still 11 days above the historical median.

  Comparison

  Compared with other producer sub-industries, semiconductor capital equipment inventories are improving faster, but the sector's relative rating is weaker than that of North American semiconductors overall.

  Risks

  If wafer fab capex recovers less than expected, equipment orders and inventory improvement could come under pressure.

• Distributors: WPG / Avnet / Arrow

  Channel inventory monitoring targets

  Strengths

  Distributor DOI fell by 2 days quarter over quarter, materially outperforming seasonality, and COGS growth at WPG and Avnet exceeded inventory growth.

  Weaknesses

  Distributor DOI remains 7 days above the historical median, and absolute inventory value is still rising.

  Comparison

  Distributors were the main contributor to supply chain improvement this quarter, outperforming the seasonal pattern seen at the customer level.

  Risks

  If revenue and COGS growth slow, the pace of channel destocking may weaken.

Key data

• Total Supply Chain DOIUp 9 days quarter over quarter, below the seasonal increase of 19 daysStill 33 days above the historical median, indicating inventories have not been fully worked down.
• Semiconductor Customer DOI60 days, up 9 days quarter over quarterClose to the seasonal increase of 8 days and 6 days above the historical median.
• Distributor DOI61 days, down 2 days quarter over quarterBetter than the seasonal increase of 4 days and still 7 days above the historical median.
• Semiconductor Company DOI114 days, up 2 days quarter over quarterBelow the seasonal increase of 5 days and still 23 days above the historical median.
• Customer Inventory IndexUp 10.8% quarter over quarter and up 3.7% over the past four quartersAbsolute customer inventories rose quarter over quarter in most end markets except Consumer.
• Semiconductor Company Inventory IndexUp 5.2% quarter over quarterProducer-side DOI was below seasonality, but absolute inventory value still rose overall.
• Analog/MCU DOIDown 2 days quarter over quarter, still 45 days above the historical medianDOI declined, but the absolute deviation remains high, so inventory risk has not been fully eliminated.
• Smartphones/Networking/PLD's/Multi-Market DOIUp 21 days quarter over quarter, 37 days above the historical medianOne of the key drivers of higher producer inventories.
• Semi Cap Equipment DOIDown 6 days quarter over quarter, 11 days above the historical medianOne of the sub-industries with the clearest improvement in inventory days.

Impact & implications

Inventory growth below seasonal norms suggests improved supply chain discipline and better demand absorption, with supply tightening. However, because total DOI remains materially above historical levels, the industry appears to be in the late stage of destocking and selective supply-demand improvement rather than a full broad-based restocking upswing. From an investment perspective, the report prefers subsectors and companies where supply-demand is tightening and inventory risk is more defensible.

Risks

• Total supply chain DOI remains 33 days above the historical median, so absolute inventory levels are still elevated.
• Customer-side performance is diverging, with larger DOI increases in communications, ODM, compute/mobile, and smartphone-related areas.
• A broad restocking cycle has not yet emerged; if the demand recovery is uneven, tightening supply signals may be insufficient to support a full upswing.
• Distributor inventory improvement partly depends on COGS and revenue growing faster than inventory; slower growth could weaken the destocking effect.
• Morgan Stanley discloses shareholding, investment banking, market making, or other service relationships with multiple covered companies, so potential conflicts of interest should be considered when using its views.

What to watch

• Whether total supply chain DOI continues to converge toward the historical median in subsequent quarters.
• Whether distributor DOI continues to decline, especially the relationship between inventories and COGS growth at WPG, Avnet, and Arrow.
• Whether customer-side DOI in communications, ODM, compute/mobile, and smartphone-related areas continues to rise.
• Whether the 45-day deviation above the historical median in Analog/MCU starts to decline meaningfully.
• Whether the decline in Semi Cap Equipment DOI can translate into order and revenue recovery.
• Whether evidence emerges that selective supply-demand tightening is spreading into full supply chain restocking.