UBS (UBS.US): Simulating an upward chip cycle, TXN becomes the top pick

According to Woofun AI, UBS has determined that the upward trend in the simulation chip cycle remains unchanged and has identified Texas Instruments (TXN.US) as the sector’s top pick. Although market sentiment has been relatively weak recently, distributor inventories have decreased by 7% to 10% month-on-month and prices have increased by 9% to 12% month-on-month. The core logic supporting the ongoing cycle is the structurally tightening supply-demand balance.

The US semiconductor report released on October 16, 2026 revealed significant micro-market fluctuations. According to data compiled by Woofun AI, the True Analog inventory index stands at 85, down 7% month-on-month and 15% year-on-year; the Power Analog inventory index is 76, down 10% month-on-month and 18% year-on-year; the MCU inventory index is 91, down 5% month-on-month and 3% year-on-year. Prices are diverging: the average selling price for True Analog rose 12% month-on-month, Power Analog increased by 9%, discrete devices surged 34%, while only MCUs declined by 7%.

Supply and demand surveys further confirm the tense situation: net demand expectations reached +79%, recent net demand is +75%, recent net price increase is 68%, expected net price increase is 65%, and lead time momentum is +65%. In terms of supply adequacy, 38% of distributors and 26% of direct buyers believe supply exceeds targets, but 70% of distributors and 76% of direct buyers are concerned about shortages in the next six months, an increase of 3 percentage points. To secure supply, 73% of respondents are placing advance orders or signing long-term agreements, 53% are increasing inventories, and those experiencing longer delivery times rose from 62% to 65%.

Corporate profit forecasts and in-depth inventory analysis reveal a differentiated industry climate. In the third quarter, TXN revenue grew 10.7% quarter-on-quarter (seasonal average 6.1%), ADI grew 8.5% (seasonal average 4.6%), MCHP grew 8.5% (seasonal average 4.3%), ON grew 5.4% (seasonal average 4.0%), while ALGM’s growth of 6.0% underperformed the seasonal average of 7.1%. Regarding inventory structure, TXN’s finished goods inventory stood at 75 days, above the industry average of 39 days and NXP Semiconductors (NXPI.US) at 43 days. Second quarter data show production up by 7% quarter-on-quarter, revenue up 11%, and total inventories steady. MCHP, executing its nine-point plan, reduced inventory days by 9 to 175; ON reduced inventory days by 11 to 189, with output about 100% of sales. TXN is considered to have special conditions for share growth due to its potential for market share recovery and the free cash flow inflection point following reduced capital expenditure.

UBS set its expectation for fourth-quarter quarter-on-quarter growth at 200 to 300 basis points, above the normal seasonal level. The upward cycle is jointly driven by low distributor inventories, continued price increases, strong demand, and tightening supply. However, the technology sector faces risks such as rapid technological changes, intensified competition, macroeconomic cycle exposure, and high capital investment; TXN is also constrained by price pressures and cyclical end-market demand. Key variables for sustained cycle continuation include the timing of distributor inventory replenishment and the duration of tightening supply.