The outlook on the semiconductor industry remains attractive as artificial intelligence continues to be the main driver of growth, Morgan Stanley analysts said in a Friday note, adding that NVIDIA (NVDA) remains their overall top pick.

The analysts said they downgraded more stocks than they upgraded but still have a positive outlook for the industry in 2025. They said that while NVIDIA should face challenges early in the year, such as reduced Hopper builds and supply chain issues, they expect strong growth later in 2025, especially with Blackwell and market share gains over Application-Specific Integrated Circuits, or ASICs.

The analysts said they praised Broadcom's (AVGO) expanding customer base and potential in ethernet growth related to AI, though long-term expectations are high. In smaller-cap AI companies, they favor Astera Labs (ALAB), which offers a range of connectivity products across both merchant and ASIC suppliers. The analysts are also neutral on Advanced Micro Devices (AMD) and Marvell Technology Group (MRVL) but remain optimistic about AI's overall prospects.

"Demand drivers are set to broaden out in 2025 (PC refresh, traditional networking/server/Programmable Logic Devices recovery) as the rolling inventory corrections of the last few years look to be in the rearview. But AI still matters most for fundamentals, where strong growth seems likely to continue in 2025," the analysts said.

Morgan Stanley cut its price target on Advanced Micro Devices to $158 from $169, and on NVIDIA to $166 from $168. The firm raised its price target on Broadcom to $265 from $233, on Marvell Technology to $120 from $102, and on Astera Labs to $142 from $94.

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