Morgan Stanley Research Analysis: AI Sector Drops to Bargain Levels After Midterm Elections, Buy These Three Types of Stocks

Written by: Chaosheng Research

The median stock in the semiconductor sector has fallen 53% from its peak, while the Philadelphia Semiconductor Index has declined approximately 40% since mid-June.

Morgan Stanley released a 93-page global thematic strategy report on November 8 with a straightforward title: "Buy the Drop".

The report argues that the market overreacted to the results of the US midterm elections. Total AI capital expenditure has not been reduced; only about 20% of US projects (accounting for 10% of global projects) have been delayed from 2028 to 2029.

Elections Disrupt Pace, Not Totals

In the 2026 midterm elections, the Democratic Party secured control of both chambers of Congress and won gubernatorial races in Texas, Ohio, and Georgia.

Texas Governor-elect Gina Hinojosa proposed pausing approvals for new data centers, while Ohio Governor-elect Dr. Amy Acton proposed a conditional pause.

Market panic subsequently spread throughout the entire AI supply chain.

The report notes that ongoing construction projects will not be interrupted, and capacity forecasts for 2027 remain unchanged.

The impact is concentrated in 2028: approximately 5GW of IT capacity (accounting for 4% of the total US plan) has been deferred from Texas and Ohio until 2029.

In other words, the elections change the pace of construction, not AI demand itself.

The report maintains its forecast for combined capital expenditure by hyperscale cloud providers at $1.6 trillion/$1.8 trillion for 2027/2028.

Delays Extend the AI Investment Cycle

The report calculated that newly added capacity for US data centers in 2028 has been revised down from a previous forecast of 24.9GW to 19.9GW, turning year-on-year growth from positive to -4%.

However, the deferred capacity does not disappear; instead, it piles up in 2029, pushing that year's additions from 22.7GW to 27.6GW, resulting in a 38% year-on-year increase.

The report identifies three ancillary benefits of this "delayed rather than canceled" scenario: smoother supply-demand rebalancing in the data center supply chain, improved credit market prospects, and higher spot power prices. Given constrained electricity supply in the US, securing power allocation becomes scarcer, giving hyperscale cloud providers priority access to resources.

Globally, total capacity for 2028 has been adjusted down from 224GW to 219GW, while 2029 and beyond remain unchanged at 271GW. The power deficit expands from 38GW to 44GW, representing 38% of required power.

Morgan Stanley Divides 'Buy the Drop' into Three Baskets

The report presents a clear framework: three categories of targets, each with distinct logic.

Basket 1: Hyperscale Cloud Providers.

The report favors companies that combine scale, capital acquisition capabilities, and proficiency in LLM technology iteration.

Brian Nowak issues Overweight ratings for META, GOOGL, and AMZN, while Adam Wood upgrades MSFT to Overweight.

This is because these companies have diversified geographic footprints, do not rely on a single state, and their capex guidance remains unchanged.

TargetRatingClosing Price on Nov 6Target PriceUpside

METAOverweight$605.08$820+35.5%

GOOGLOverweight$282.57$375+32.7%

AMZNOverweight$260.21$335+28.7%

MSFTOverweight$539.93$650+20.4%

Basket 2: Curated Data Center Supply Chain.

The report recommends buying undervalued power and infrastructure companies during pullbacks, while cautioning against potential supply chain inventory buildup risks in 2028.

High-conviction targets include BE (Bloom Energy), SEI (Solaris), VST (Vistra), TLN (Talen Energy), and CEG (Constellation Energy). The report believes the risk-reward profile remains favorable for these companies even if data center growth comes in below expectations.

For colocation data centers, EQIX (Equinix) has limited exposure to Texas (its 9 operating facilities account for only about 3% of its global 280 sites), which could actually allow it to benefit from higher pricing.

Basket 3: Software Enablers and AI Adopters.

The report anticipates that value creation is shifting from semiconductors and infrastructure to software and application layers.

Cybersecurity and infrastructure software are identified as preferred entry points, with Overweight recommendations for PANW (Palo Alto Networks) and CRWD (CrowdStrike).

For SaaS, SNOW (Snowflake), DDOG (Datadog), and MDB (MongoDB) are also upgraded to Overweight.

Semiconductor Decline Deep Enough, Report Says Time to Pick Up Bargains

A chart in the report illustrates the point: as of November 6, the median stock covered by Morgan Stanley's semiconductor research had dropped 53% from its 52-week high, with an average decline of 48%.

The report views this as a buying opportunity because the core pillar of AI spending (demand) remains intact, with token consumption still growing exponentially.

Compute chips are highlighted as the sub-sector with the highest conviction.

Both NVDA and AVGO trade at approximately 9x CY28 P/E, but NVDA is the top pick for three reasons: a broader customer base compared to AMD/ASICs, continued growth potential even under power constraints by increasing revenue per watt (next-gen Feynman architecture is expected to drive revenue per GW up from roughly $40 billion with Rubin to over $50 billion), and a leading position on the tokens/watt metric.

In memory/storage, the report prefers MU and SNDK. SanDisk is specifically highlighted: at the Nov 6 close of $835, assuming buybacks run at roughly 50% of revenue, the company could repurchase over 50% of its outstanding shares by the end of 2028.

Sub-sectorTop Picks

Compute ChipsNVDA, AVGO

StorageMU, SNDK

Analog ChipsNXPI, ADI

Optical CommunicationsALAB, MRVL

AI Adoption Has Shifted from Experimentation to Quantifiable Returns

The report cites an analysis by AlphaWise covering approximately 18,000 earnings reports and meeting transcripts.

44% of companies in the S&P 500 mentioned at least one quantifiable AI benefit over the past 12 months, up from 32% a year ago.

The share of companies citing cost savings or AI-driven revenue growth has risen from 16% to 26%.

The financial sector leads the way: 67% of financial companies cited tangible improvements from AI, compared to just 42% a year ago. The report advises expanding investment focus from AI builders to AI adopters, including banks, insurance companies, and consumer-facing firms.

Risk Warning

This article is a compilation and interpretation by Chaosheng Research of third-party broker research reports. All ratings, target prices, earnings forecasts, and related judgments cited herein are the views of the respective broker analysts, reflecting only the stance of their affiliated institutions, not the views of Chaosheng Research, and do not constitute any investment advice.

Markets involve risk, and decisions should be made independently. This article should not serve as the basis for buying or selling any securities.