Semiconductor stocks are plunging Thursday after a major Wall Street firm and an executive at a large chip equipment company warned that memory chip demand is deteriorating versus expectations.

"Memory markets have worsened in recent weeks. For DRAM [memory chip], demand is weakening, inventory and pricing pressures are building, and vendors are struggling to move bits," Morgan Stanley analyst Shawn Kim said in a note to clients Thursday. "In NAND [flash memory], there is just too much supply. Earnings risks are emerging from 3Q and our cautious view on memory is playing out."

Last month the firm downgraded its rating to cautious from in line for the semiconductor industry, citing rising chip inventory levels.

Kim noted his recent conversations with semiconductor sales people and buyers, which revealed a increasingly negative environment for the memory market.