Written by: Rita
The market is concerned that the analog chip cycle has peaked, but UBS believes the upward trend remains intact. Analog chip distributors' inventories declined by 7% to 10% quarter-over-quarter, while prices rose by 9% to 12%, reflecting strong demand and tightening supply. Texas Instruments (TXN) is the top pick.
In its U.S. semiconductor report issued on October 16, 2026, UBS noted that three key surveys collectively point to a continued upward cycle in analog chips. Despite recent weakness in investor sentiment, demand expectations remain strong; both direct buyers and distributors report tight supply, with most customers anticipating price increases for analog components and distributors' inventories declining slightly again without yet beginning to replenish.
The earnings expectations for Texas Instruments (TXN) and Analog Devices (ADI) exceed seasonality. UBS forecasts TXN’s Q3 revenue to increase by 10.7% quarter-over-quarter, exceeding seasonality by 6.1%; ADI to increase by 8.5%, exceeding seasonality by 4.6%; Microchip Technology (MCHP) to increase by 8.5%, exceeding seasonality by 4.3%; and ON Semiconductor (ON) to increase by 5.4%, exceeding seasonality by 4.0%.
Inventory is decreasing while prices continue to rise.
Distributor inventory monitoring shows that the inventory index for True Analog units is 85 (1Q24 = 100), down 7% quarter-over-quarter and 15% year-over-year; Power Analog inventory is at 76, down 10% quarter-over-quarter and 18% year-over-year; MCU inventory is at 91, down 5% quarter-over-quarter and 3% year-over-year. UBS believes that distributor inventory has not yet begun to rebuild.
In terms of pricing, the average selling price of True Analog rose 12% quarter-over-quarter, Power Analog increased 9%, MCU declined 7%, and discrete devices rose 34%. UBS noted that TXN showed positive outliers in True Analog and Power Analog pricing, with MCU prices flat; MCHP saw low single-digit declines across all three product categories; and ON began to strengthen in True Analog pricing after several quarters of decline.
UBS expects the trend of declining distributor inventories to reverse over the next few quarters as supply tightens. Current low inventory levels indicate that restocking demand has yet to materialize, and the cyclical upward trend remains unchanged.
Strong demand and tight supply
Demand expectations slightly declined from an extremely strong level in Q2 but remain high. A survey of semiconductor buyers shows that the near-term net demand expectation is +79%, down 10 percentage points from the previous quarter; recent net demand is +75%, recent price increases net +68%, expected price increases net +65%, and delivery time momentum is +65%. UBS believes that demand expectations have stabilized at already strong levels.
On the supply side, 38% of distributors and 26% of direct buyers believe their current inventory exceeds target levels. The supply adequacy for direct buyers has weakened relative to demand, potentially leading to localized supply constraints. Seventy percent of distributors and 76% of direct buyers expressed concern about supply shortages over the next six months, up by 3 percentage points from the previous quarter.
UBS noted that buyers are prioritizing supply certainty over price negotiation. Seventy-three percent of respondents secured supply through advance orders or long-term supply agreements, and 53% increased their inventory or safety stock. The proportion of respondents experiencing extended delivery times rose from 62% to 65%.
Q3 profits exceeded seasonal expectations
TXN's Q3 revenue is expected to increase by 10.7% quarter-over-quarter, exceeding seasonality by 6.1%. ADI is expected to grow 8.5% quarter-over-quarter, exceeding seasonality by 4.6%; MCHP is expected to grow 8.5%, exceeding seasonality by 4.3%; ON is expected to grow 5.4%, exceeding seasonality by 4.0%; Allegro (ALGM) is expected to grow 6.0%, falling short of seasonality by 7.1%.
UBS believes that TXN and ADI have particularly favorable earnings expectations. The preferred rationale for TXN includes its inventory position, potential for market share recovery, and a free cash flow inflection point following reduced capital expenditures. TXN’s finished goods inventory stands at 75 days, higher than the industry average of 39 days and above NXP’s (NXPI) 43 days. UBS believes that TXN is uniquely positioned for market share growth amid industrial recovery and structural tailwinds in data centers.
The financial report's inventory depth analysis shows that, in the second quarter, the simulated company's production increased by 7% quarter-over-quarter, revenue rose by 11% quarter-over-quarter, and total inventory remained flat. UBS believes the industry as a whole is leaning toward an offensive stance, while closely monitoring inventory levels. MCHP continues to execute its Nine-Point Plan, with inventory days decreasing by 9 days quarter-over-quarter to 175 days; ON’s inventory days decreased by 11 days quarter-over-quarter to 189 days, with production still at approximately 100% of sales.
The upward trend on the cycle remains unchanged.
UBS has set its Q4 sequential growth forecast at 200 to 300 basis points, above normal seasonality. Earnings expectations are generally favorable, with TXN and ADI standing out particularly. TXN’s inventory position and free cash flow inflection point make it the top pick in the analog segment.
UBS noted that four signals—low distributor inventories, continuing price increases, strong demand, and tightening supply—support the continuation of the upward cycle. Despite recent weak investor sentiment, fundamental indicators support the upward trajectory of the cycle.
In terms of risks, UBS highlights that investments in the technology sector carry high risks due to rapid technological changes, intensifying competition, and exposure to macroeconomic cycles. TXN faces risks including rapid technological advancements, intense competition, high capital requirements, pricing pressures, and cyclical demand in end markets.
Whether the simulated chip cycle can continue to rise depends on when distributors begin restocking and how long the supply tightening will last.
Disclaimer
This article is a compilation and interpretation by Chaoxiang Research of a third-party brokerage research report (UBS, October 16, 2026), combined with publicly available market information. The ratings, price targets, earnings forecasts, and related judgments cited herein reflect the views of the brokerage's analysts and represent only the position of their respective institution; they do not reflect the views of Chaoxiang Research nor constitute any investment advice.
The market carries risks; make decisions independently. This article should not be used as a basis for buying or selling any securities.