With China banning chips made by major U.S. memory chip maker Micron, Morgan Stanley has identified two memory chip stocks with big growth potential. A Wall Street bank research report predicts that the memory chip market will turn around, supply and demand are expected to reach a balance in the third quarter of this year, and prices will start to rise from the fourth quarter. The investment bank’s research suggests that supply and demand for dynamic random access memory (DRAM) will soon reach equilibrium as mobile device makers slash supply and raise prices. DRAM is a semiconductor used to store data and is a key chip used in laptops, cell phones, servers and other electronic computing devices. Samsung Electronics is Morgan Stanley’s “top pick,” followed by SK Hynix. Shares of the two South Korean companies are also traded in the U.S. and Europe. Samsung shares have risen 10% from December lows, with analysts’ consensus price target pointing to potential upside of 16.8% from current levels. However, the stock is still down 10% from a two-year high. SMSD-GB 1Y line “The rate of change in both pricing and inventory is improving, and these have historically been the key drivers of share price performance,” Morgan Stanley equity analysts Shawn Kim and Duan Liu told CNBC on May 21. in a report from a client. “Samsung is our top pick, but we believe SK Hynix will take the lead in the upcoming cyclical growth curve as the market is very bearish on it.” Shares of SK Hynix have fallen five times over the past two years. Still, the stock has rebounded 16% from its December 2022 low. Analysts’ consensus price target points to room for a further 14% upside from the current share price. The Morgan Stanley research note on the HXSCL 1Y line comes ahead of Beijing’s announcement to ban some purchases from U.S. memory chipmaker Micron Inc. Chinese authorities said earlier this week that Micron products had failed a security review they began two months ago, noting “serious potential cybersecurity issues.” Micron said only chips used for networking and infrastructure would be subject to restrictions, while memory made for computers and smartphones would be exempt from the new rules. Samsung, SK Hynix and Micron are among the few companies making high-end memory chips. Morgan Stanley notes that the peak multiples for its two stocks could be 85% to 145% higher than current values – and that’s before factoring in any potential growth in artificial intelligence. The investment bank added that the market may be underestimating the impact of AI on memory chips because the technology is still in the early stages of development and could last decades rather than years. “Adoption of AI servers could increase demand for all types of memory, as AI servers have 2-3 times the memory capacity of traditional servers,” the analyst said. “We see significant upside going forward and maintain ( overweight).” — CNBC’s Michael Bloom reports.