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

Morgan Stanley stated that the AI sector has fallen to a buying point following the midterm elections, with total capital expenditure unchanged, and advised buying on dips across three categories of targets.

Written by: Chaoxiang Research

The median individual stock in the semiconductor sector has fallen 53% from its peak, and the Philadelphia Semiconductor Index has dropped approximately 40% since mid-June. On November 8, Morgan Stanley released a 93-page global thematic strategy report with the straightforward title: "Buy the Drop." The report argues that the market overreacted to the results of the US midterm elections; total AI capital expenditure was not downgraded, with only about 20% of US projects (accounting for 10% of global projects) delayed from 2028 to 2029.

Elections Disrupt Rhythm, Not Total Volume

In the 2026 midterm elections, the Democratic Party took control of both the Senate and the House of Representatives, and won governorships in Texas, Ohio, and Georgia. Incoming Texas Governor Gina Hinojosa proposed pausing approvals for new data centers, while incoming Ohio Governor Dr. Amy Acton proposed conditional pauses. Market panic subsequently spread throughout the entire AI supply chain. The report believes that ongoing construction projects will not be halted, and 2027 capacity forecasts remain unchanged. The impact concentrates on 2028: approximately 5GW of IT capacity (representing 4% of the total US plan) is delayed from Texas and Ohio until operations begin in 2029. In other words, the elections alter the pace of construction, not AI demand itself. The report maintains its combined capital expenditure forecast of $1.6 trillion/$1.8 trillion for hyperscale cloud vendors in 2027/28.

Delays Instead Extend the AI Investment Cycle

The report calculated: US data center new capacity for 2028 is revised down from the previous forecast of 24.9GW to 19.9GW, changing year-on-year growth from positive to -4%. However, the delayed capacity does not disappear but is pushed into 2029, causing that year's new additions to jump from 22.7GW to 27.6GW, reaching a year-on-year growth of 38%.

The report sees three side benefits to this "delay rather than cancel" landscape: smoother supply-demand rebalancing across the data center supply chain, an improved outlook for the credit market, and higher prices for computing power leases. Against the backdrop of constrained electricity supply in the US, securing power becomes scarcer, giving hyperscale cloud vendors priority access to resources.

On a global scale, total capacity for 2028 is revised down from the previous 224GW to 219GW, while 2029 and beyond remain unchanged at 271GW. The power gap widens from 38GW to 44GW, accounting for 38% of required power.

Morgan Stanley Divides "Buy the Drop" into Three Baskets

The report framework is clear: three categories of targets, each with its own logic.

Basket 1: Hyperscale Cloud Vendors. The report favors companies that combine scale, capital acquisition capabilities, and LLM technology iteration abilities. Brian Nowak upgrades META, GOOGL, and AMZN to Overweight, while Adam Wood upgrades MSFT. The rationale is that these companies have diversified geographic footprints, do not rely on a single state, and their capex guidance remains unchanged.

TargetRatingClosing Price on Nov 6Target PriceUpsideMETAOverweight$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 remaining vigilant 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 these companies maintain favorable risk-reward profiles even if data center growth falls short of expectations. Regarding colocation data centers, EQIX (Equinix) has limited exposure to Texas (its 9 operating centers account for only about 3% of its global 280 facilities), which could instead benefit from higher pricing.

Basket 3: Software Enablers and AI Adopters. The report anticipates that value creation is shifting from semiconductors and infrastructure to the software and application layers. Cybersecurity and infrastructure software are preferred entry points, with upgrades including PANW (Palo Alto Networks) and CRWD (CrowdStrike). In SaaS, upgrades include SNOW (Snowflake), DDOG (Datadog), and MDB (MongoDB).

Semiconductor Pullback Is Deep Enough, Report Says It's Time to Pick Up Shares

The report uses a chart to illustrate the point: As of November 6, the median coverage stock from Morgan Stanley's semiconductor segment fell 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 usage still growing exponentially.

Compute chips are the sub-sector with the highest conviction in the report. Both NVDA and AVGO trade at approximately 9x CY28 P/E, with NVDA being the top pick for three reasons: a broader customer base compared to AMD/ASIC, the ability to grow by increasing revenue per watt even under constrained power environments (next-gen Feynman architecture is expected to generate over $50 billion in revenue per GW, up from around $40 billion for Rubin), and leading position on the tokens/watt metric.

In memory/storage, the preference is for MU and SNDK. The report specifically highlights SanDisk; based on the November 6 closing price of $835, if buybacks amount to roughly 50% of revenue, they could repurchase over 50% of outstanding shares by the end of 2028.

Sub-sectorTop PicksCompute ChipsNVDA, AVGOMemoryMU, SNDKAnalog ChipsNXPI, ADIOptical CommunicationsALAB, MRVL

AI Adoption Has Moved From Experiments to Quantifiable Returns

The report cites AlphaWise analysis of approximately 18,000 earnings reports and meeting minutes. S&P 500 companies mentioning at least one quantifiable AI benefit in the past 12 months reached 44%, up from 32% a year ago. The proportion of companies mentioning cost savings or AI-driven revenue growth rose 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 recommends broadening the investment perspective, shifting focus from AI builders to AI adopters, including banking, insurance, and consumer companies.

Risk Disclaimer

This article is a compilation and interpretation by Chaoxiang Research of third-party brokerage research reports. The ratings, target prices, earnings forecasts, and related judgments cited herein reflect the views of the respective brokerage analysts, represent solely the stance of their affiliated institutions, do not constitute the views of Chaoxiang Research, and do not form any investment advice.

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

Join the official Coincamps community:

X: https://x.com/coincamps

Telegram: https://t.me/coin_camps