Semiconductor inventory continues to run off, but remains above the historical median, with replenishment expected to start gradually

Overview

This report is Morgan Stanley’s update on North American semiconductor supply-chain inventories, with DOI as the key metric. It notes that inventories continue to decline, but due to rising producer inventories, the overall drawdown is weaker than seasonal norms. Customer and distributor inventories have improved more than seasonal trends, and some end markets such as Auto OEMs, Storage, Consumer, and Contract Manufacturers are already below the 10-year median; however, producer-side inventories remain materially above historical levels.

Core views

The core view is that the semiconductor inventory cycle has improved but is not yet fully normalized. In the near term, ample supply, short lead times, and macro volatility are limiting large-scale restocking incentives on the downstream side, especially for Auto OEMs. At the same time, constructive signals are increasing, including wafer capacity being reallocated to AI-related SKUs leading to the accumulation of mature-node constraints, broader pricing pressure, and no relief yet in storage-related input-cost inflation. Based on these changes, the report expects replenishment to start gradually from this quarter, assuming no meaningful supply shocks or broader demand tightening.

Analysis framework

The report uses a supply-chain layering inventory tracking framework, breaking semiconductor inventories into three tiers: customers, distributors, and producers, and comparing sequential changes, year-over-year changes, seasonal shifts, the 10-year historical median, and the average of the past four quarters. Through end-market and product-category segmentation, it identifies which parts of the chain are driving inventory pressure and where replenishment or pricing improvement is likely to emerge first.

Methodology notes

• inventory_cycleDOI inventory tracker

  Inventory-day tracking

  Inventory days are measured by DOI against sales or cost, and compared with seasonal change, the 10-year historical median, and the average of the past four quarters to judge whether destocking or accumulation is abnormal.

• supply_chain_layeringproducer-distributor-customer inventory stack

  Layered supply-chain inventory

  Inventories are split into semiconductor companies, distributors, and customers to avoid misjudging total supply-chain pressure by looking at only one link.

• cycle_signalseasonality-adjusted inventory change

  Seasonality-adjusted inventory change

  Actual sequential changes in inventory days are compared with normal seasonal change to determine whether inventory improvement is normal seasonality or better-than-expected drawdown.

Asset mapping & comparison

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

• ADI, NXP

  High-end analog exposure

  Strengths

  They have stronger defensiveness and high-end analog positioning, and may benefit from mature-node constraints and pricing improvement.

  Weaknesses

  Analog/MCU inventories are still materially above the historical median, so it may take longer to return shipments to demand-aligned levels.

  Comparison

  Compared with generic Analog/MCU exposure, the report prefers higher-end, more defensive analog names.

  Risks

  If restocking is delayed or automotive and industrial demand remains weak, inventory normalization may lag expectations.

• ALGM

  Long-duration structural exposure

  Strengths

  The report lists it as a favored name with secular growth exposure.

  Weaknesses

  It remains sensitive to the semiconductor inventory cycle and downstream demand timing.

  Comparison

  Compared with more cyclical inventory-repair names, ALGM emphasizes longer-term growth characteristics.

  Risks

  If automotive, industrial, or related end-demand remains weak, valuation and growth expectations may come under pressure.

• NVDA, AVGO, ALAB

  Compute and network exposure

  Strengths

  These names benefit from AI-related demand and wafer capacity reallocation toward AI-related SKUs.

  Weaknesses

  Valuation, supply constraints, and customer capex timing can amplify volatility.

  Comparison

  Compared with traditional semiconductor-cycle names, this group is more driven by AI compute and network demand.

  Risks

  Slowing AI demand, supply-chain bottlenecks, or customer order adjustments could weigh on performance.

• SNDK, MU

  Storage beneficiaries

  Strengths

  The report says storage-related input cost inflation has not shown signs of easing, which could support price and margin recovery.

  Weaknesses

  Storage is highly cyclical, with significant volatility in both inventory and pricing.

  Comparison

  Compared with logic and analog, storage is more sensitive to pricing cycles and cost inflation.

  Risks

  If supply grows too quickly or downstream demand misses expectations, pricing recovery could reverse.

• AMAT, KLAC, MKSI

  Semiconductor equipment beneficiaries

  Strengths

  They may benefit from capex demand driven by capacity reallocation, advanced-node shifts, and mature-node constraints.

  Weaknesses

  The report’s view on semiconductor capital equipment is In-Line, and overall industry resilience may be lower than North America semiconductors overall.

  Comparison

  Compared with AI compute and high-end analog names, the equipment side is more directly exposed to the capex cycle.

  Risks

  Wafer-fab capex cuts, export controls, or delayed orders could pressure performance.

• Auto OEMs

  Downstream customer inventory and demand signal

  Strengths

  Continued inventory declines could enable gradual restocking.

  Weaknesses

  The report notes restocking impetus for Auto OEMs is especially limited, with inventories already further below the median.

  Comparison

  Compared with Consumer and Contract Manufacturers, Auto OEMs have experienced a longer period of inventory runoff.

  Risks

  Macro volatility, weak end demand for autos, or ample supply could continue to suppress restocking.

Key data

• Total supply-chain DOIDown 5 days sequentially; 6 days less than the expected 11-day seasonal decline; still 31 days above the historical medianOverall inventories continue to decline but less than seasonal expectations, mainly due to rising producer inventories.
• Customer inventory DOIDown 5 days to 52 days; stronger than the 3-day seasonal decline by 2 days; 2 days below the historical medianConsumer and Contract Manufacturers had the largest sequential declines, while Auto OEMs have de-stocked for several consecutive quarters.
• Distributor inventory DOIDown 2 days sequentially; historical median is 54 days; still 9 days above itCOGS growth for Arrow and Avnet has been faster than inventory growth, driving DOI lower; WPG’s DOI rose 2 days.
• Semiconductor company inventory DOIUp 3 days to 111 days; 4 days weaker than a seasonal decline of 1 day expected; 22 days above historical medianInventory increases were mainly from Memory, Components, Analog/MCU, and Foundries, while Semicap and Smartphone saw larger declines.
• Analog/MCU DOIUp 7 days sequentially; 47 days above historical medianThe destocking pace for Analog/MCU remains slower than average, but the report prefers high-end, defensible analog exposure.
• Smartphone DOIDown 10 days sequentially; 19 days above historical medianSmartphone inventories have improved but remain above historical levels.
• Consumer DOIDown 18 days sequentially; 1 day below historical medianConsumer-side inventory drawdown is relatively pronounced.
• Contract Manufacturers DOIDown 13 days sequentially; 4 days below historical medianThe contract manufacturing side is already below the historical median.
• Components DOIUp 6 days sequentially; 1 day above historical medianComponent inventories are slightly above the historical median, and the four-quarter average has risen.

Impact & implications

For investors, improving inventory drawdown suggests the semiconductor cycle is repairing, but high producer inventories mean the pace of recovery is unlikely to accelerate linearly. If mature-node capacity constraints, pricing pressure, and storage cost inflation continue to spread, companies with pricing power, AI-demand exposure, storage upside sensitivity, or semiconductor equipment leverage may perform better. Conversely, end markets and product categories with elevated inventories and weak demand elasticity may remain under pressure.

Risks

• Producer inventories remain above the historical median and may slow recovery in the semiconductor cycle.
• Ample supply, short lead times, and macro volatility could suppress large-scale restocking by customers.
• If downstream demand from sectors such as Auto OEMs stays weak, replenishment could fall short of expectations.
• Analog/MCU inventories remain elevated, and it may take longer to bring shipment levels back in line with demand.
• If AI-related demand or storage price recovery underperforms, the preferred names could come under pressure.
• The report discloses that Morgan Stanley has investment banking, market-making, or other service relationships with several covered companies, so investors should consider potential conflicts of interest.

What to watch

• Whether total supply-chain DOI continues to revert toward the 10-year historical median.
• Whether customer and distributor inventory declines translate into real orders and restocking.
• Producer inventories, especially Analog/MCU, Memory, and Components, and whether they have peaked.
• Whether mature-node capacity constraints intensify as AI-related SKUs compete for wafer capacity.
• Whether the semiconductor pricing spread continues to expand.
• Whether storage cost inflation and price trends persist.
• Whether Auto OEMs transition from continued drawdown to restocking.
• Whether the Attractive view on North America semiconductors is sustained and whether the In-Line view on semiconductor capital equipment improves.