SAN FRANCISCO (MarketWatch) — Chip stocks rallied Monday on an RBC Capital note arguing that the semiconductor industry is entering a new phase in which chip makers are expected to scale back capital expenses while generating more cash.

RBC analyst Doug Freedman upgraded several chip-makers to outperform, led by Micron Technology (MU), Nvidia Corp.(NVDA) Texas Instruments and Broadcom Corp.

Micron and Nvidia were last rallying more than 3%, while TI was up 1.7% and Broadcom gained 2%.

Freedman said the chip industry was going through a transition to “a more mature era, and slower unit demand,” which is “leading to excess capacity and broader industry under-utilization, which we expect to persist through 2016.”

“Given this backdrop, lower capital investments are needed as today’s capacity is sufficient to meet demand,” he wrote. “Consequently, we are likely to see greater free cash flow generation in the industry with companies endorsing shareholder-friendly capital-allocation strategies.”

With capital expenses expected to become a smaller percentage of sales, he said, chip-makers could use cash “for shareholder-friendly actions, including buybacks and dividends.”

The Philadelphia Semiconductor Index (SOX) was up more than 1%, while the Nasdaq Composite Index (RIXF) and the Morgan Stanley High Tech 35 Index (MSH) were each up a fraction.

 By Benjamin Pimentel