Morgan Stanley: PC chip correction deepens in fourth quarter as manufacturers’ outlooks diverge

Why could the fourth-quarter correction be deeper?

Morgan Stanley believes customers bought PC chips early in the first three quarters of 2026 for fear of being unable to obtain them. This supported third-quarter shipments but also built up inventory, potentially leading to a deeper correction in the fourth quarter.
Customers currently plan to reduce fourth-quarter purchases by only 5%–10% quarter on quarter, but Parade’s fourth-quarter revenue guidance calls for a sequential decline of 20%–25%, below expectations and suggesting a potentially larger correction in components.
The Windows activation cycle remains above 200 days, and PC chip customers’ price increases in the second half are also noticeably smaller than in the first half; the bank therefore believes weakness could continue into the first quarter of 2027.

Consumer demand outside PCs is not uniformly weak. Morgan Stanley notes that demand for Internet of Things devices with low memory content is relatively well supported; after sequential revenue growth in the third quarter, Espressif guided for further sequential growth in the fourth quarter.
Price increases for some products reflect higher foundry, assembly and testing, and known-good die costs. The bank says television SoC prices have reached several times their levels over the past few years amid rising die prices, primarily for DDR4.
Large IC design companies generally have better supply-chain management and lower PC exposure, making it easier for them to navigate a downturn; smaller design companies tend to rely more heavily on PCs.

Morgan Stanley believes it is only a matter of time before edge AI takes off, but PC chips currently have no clear new growth driver. PC chip customers’ preliminary outlook for 2027 ranges from flat to a decline of 20% year on year.
The bank remains cautious on PC chips, has no Overweight ratings among the relevant companies it covers, and is waiting for the cycle to bottom at some point in 2027.

Elan has begun shipping non-PC products such as drones, ADAS and AI glasses, but notebooks still account for a high share of its business. Morgan Stanley believes growth in non-PC businesses, led by drones, is unlikely to fully offset weak PC demand.
The bank adjusted its Elan earnings-per-share forecasts for 2026, 2027 and 2028 by +1%, -20% and -16%, respectively. The 2026 increase incorporates actual second-quarter results supported by investment income; the cuts for the following two years reflect lower revenue and gross margin forecasts.
Morgan Stanley downgraded Elan from Overweight to Equal-weight and cut its target price from NT$250 to NT$160. Its base case assumes non-PC businesses rise to 15% of revenue in 2027 and gross margins of about 46%–47% in 2026–2028, below 2025’s 49%.