Morgan Stanley: Tech Hardware Investment Theme Shifts from Recovery to Structural Upgrade and AI Infrastructure

According to reports from Zhitong Finance APP, Morgan Stanley noted in its feedback from the 2026 China BEST Conference that the current investment theme in the tech hardware sector is shifting from "total volume recovery" to "structural upgrade + AI infrastructure." The sector maintains an In-Line rating.

Key highlights include:

• The AI transceiver segment is characterized by a supply-driven demand pattern.
• The iPhone supply chain is expected to see a dual increase in ASP (Average Selling Price) and gross margins, representing a clear profit theme for the second half of the year.
• Android players are relying on premiumization to offset shipment pressure.
• The inflection point for the AR/VR industry is expected in 2027.
• A wave of new AI hardware launches in Q4 2026 will create event-driven opportunities.
• Stock selection should focus on companies with strong supply chain barriers and strong product premiumization capabilities, rather than betting on sector beta recovery.

Morgan Stanley distilled several core themes from the conference, covering AI infrastructure, smartphone supply chains, and emerging hardware categories.

AI Transceivers

The sector continues to see high景气 (prosperity). Demand is expected to remain strong from the second half of 2026 through 2027. However, supply bottlenecks are becoming prominent, with shortages in 1.6T DSPs and high-end EML/CW chips. Manufacturers with supply chain resource advantages are likely to capture excess order share, with revenue and profit growth significantly outpacing peers.

Smartphone Supply Chain: Clear Divergence

iPhone:

• The new product cycle has shown surprising resilience, with most supply chain companies optimistic about post-launch performance.
• Components featuring new designs and specification upgrades are expected to see double-digit improvements in ASP and gross margins compared to the previous generation, offering clear structural upgrade benefits.

Android:

• Headwinds persist. Rising storage costs are being passed on to end products, leading to higher ASPs and expected shipment pressure in the second half of 2026.
• However, from Q3 2026, storage cost increases are expected to return to normal ranges. If terminal manufacturers successfully raise ASPs, they are likely to maintain high pricing strategies to expand the industry's total addressable market (TAM).
• Android supply chain players are actively adjusting product mixes, shifting resources toward high-value, high-end segments. They are relying on product portfolio upgrades to absorb shipment pressure, prioritizing profitability over scale expansion.

Emerging Hardware

AR/VR:

• The industry is in a preparatory phase. The inflection point for positive growth is expected in 2027.
• Q4 2026 will focus on product groundwork and ecosystem building. Multiple new products are expected to launch in 2027, offering high certainty for industry recovery.

New AI Hardware:

• A密集 (dense) launch window is expected in Q4 2026, with multiple manufacturers planning new product releases. This will provide short-term catalysts for the consumer electronics sector.
• However, mass production scale and commercialization timelines require continued monitoring.

Key Risks

Upside Risks:

• AI infrastructure capital expenditure exceeding expectations.
• iPhone new product sales and component upgrade penetration rates higher than expected.
• Accelerated premiumization of Android brands.
• Market acceptance of AR/VR and AI hardware products exceeding expectations.

Downside Risks:

• Shortages of 1.6T and high-end optical chips lasting longer than expected, constraining supply chain shipments.
• Global consumer electronics demand recovery falling short of expectations.
• Storage costs rising sharply again, squeezing mid- and downstream profit margins.
• Intensified industry competition leading to simultaneous declines in product ASP and gross margins.

Conclusion

Morgan Stanley summarized that hardware sector opportunities no longer come from an overall industry recovery; structural opportunities are the main theme:

• AI Transceivers: First-mover companies have stronger order visibility and pricing power.
• iPhone Supply Chain: Profit recovery is highly certain.
• Android Sector: Requires waiting for premiumization to materialize.
• Q4 AI Hardware: Short-term event-driven catalysts.

Overall stock selection strategy: Prioritize targets with deep supply chain barriers and a continuous shift toward high-end product structures.