With China in sharp focus, Morgan Stanley forecasts a rough 2019 for the companies that make the chips in the world's smartphones and servers (MU, WDC, TXN, NXPI, CY, MCHP)

Semiconductor companies could suffer a "sharp contraction" in revenue as a cluster of challenges, from rising inventory levels to trade tensions with China, swamp the industry, Morgan Stanley warned in a noted published on Wednesday.

Morgan Stanley analyst Joseph Moore wrote that he expects to see 5% revenue declines across the semiconductor sector in 2019, despite industry data which showed semiconductor sales on the rebound in November after a weak October.

According to the Semiconductor Industry Association, global chip sales increased roughly 10% year-over-year in November, to $41.4 billion. Semiconductors are used in everything from smartphones to automobiles, with much of the manufacturing taking place in China.

Morgan Stanley raised its overall chip industry revenue growth forecast for 2018 from 13% to 14%, but maintained a low-single-digital growth-forecast for the fourth quarter.

The industry faces growing challenges including excess inventory and weak demand, combined with China trade tensions and slowing M&A, Moore wrote. Chip companies will report Q4 results in the coming weeks, and the signs of trouble could appear in companies' end of year results and their Q1 forecasts.

The biggest companies at risk, Morgan Stanley warned, are memory companies such as Micron Technology and Western Digital; Analog companies such as Texas Instruments and NXP; and MCU companies Cypress Semiconductor Corporation and Microchip Technology.

"We remain cautious on semis," Moore wrote.

That note was published Wednesday, just before Apple made an announcement of its own to lower its revenue guidance for the fourth quarter. This sent the stocks of chip manufactures like Qualcomm and Intel stumbling.

The gist, according to Apple CEO Tim Cook, is that a downturn in the Chinese economy and US/China relations have made it extremely tenuous to be a tech company dependent on revenues from China.