"Memory 'super cycle' drives up costs, Morgan Stanley downgrades ratings for multiple tech hardware giants"

With memory prices skyrocketing and weakening demand for non-AI hardware, Morgan Stanley significantly downgraded ratings for major hardware manufacturers such as Dell Technologies, Inc. Class C (DELL.US), HP Inc. (HPQ.US), and Hewlett Packard Enterprise Co. (HPE.US) on Monday, warning that the entire industry is facing increasing pressure on profit margins. Morgan Stanley analysts pointed out that the industry is currently in a "memory super cycle," with NAND and DRAM spot prices rising by about 50% to 300% in the past six months. The rapidly rising component inflation is expected to continue to drag down profits for hardware manufacturers, with the impact expected to continue until 2026. The institution stated that based on historical experience, 6 to 12 months after memory costs begin to rise, the gross profit margins of hardware OEMs usually decline. It is expected that the median global OEM gross profit margin in 2026 will decrease by 60 basis points, while the market consensus is still for a slight expansion. Dell Technologies, Inc. Class C and HP Inc. are seen as the companies most sensitive to the rise in memory prices, as they are highly dependent on memory-intensive PC and server products. Hewlett Packard Enterprise Co. faces a dual pressure of acquisition integration challenges and rising component costs. Dell Technologies, Inc. Class C downgraded to "underweight" with target price cut from $144 to $110 Morgan Stanley downgraded Dell Technologies, Inc. Class C ratings from "overweight" to "underweight" for two consecutive levels, believing that the rising memory costs combined with the lower profit margins of AI server structures are putting pressure on the company's short-term profit prospects. The report pointed out that Dell Technologies, Inc. Class C is "one of the stocks that are most severely impacted by the rise in memory costs," and significantly reduced its 2027 fiscal year gross margin forecast to 18.2%, down by 220 basis points compared to previous expectations. Analysts also lowered EPS forecasts by about 12% for the company, anticipating that even if AI server revenue increases significantly next year, overall profitability will still be under pressure. HP Inc. downgraded to "underweight" as PC refresh cycles struggle against memory price hikes HP Inc. was downgraded from "equal weight" to "underweight," with the target price lowered from $26 to $24. While analysts acknowledge that the PC refresh cycle is becoming more stable, the rising prices of DRAM and NAND will squeeze the profit margins of the company's personal systems business. Morgan Stanley lowered its 2026 fiscal year gross margin forecast by 90 basis points to 19.7%, 130 basis points below market consensus. Despite raising revenue expectations for that fiscal year to $56.5 billion, EPS estimates were still cut by 9%. Hewlett Packard Enterprise Co. downgraded to "equal weight" with profit expectations lowered after acquiring Juniper Networks, Inc. Morgan Stanley downgraded Hewlett Packard Enterprise Co. ratings from "overweight" to "equal weight," with the target price lowered from $28 to $25. Although the acquisition of Juniper Networks, Inc. is expected to increase the company's share of the network business, analysts emphasize that the integration process and rising component costs will limit overall profitability. The 2026 fiscal year gross margin forecast was lowered by 260 basis points to 32.9%, and EPS was reduced from $2.52 to $2.18. Morgan Stanley stated that even if manufacturers try to mitigate cost pressures by raising prices, cutting other material costs, or reducing operating expenses, they typically can only offset about 70% of the memory inflation pressure. Analysts estimate that for every 10% increase in memory prices, there will still be a 10 to 40 basis points decline in gross margins even if mitigation measures are taken, and if no measures are taken, the pressure could rise to 130 basis points. Model simulations show that Dell Technologies, Inc. Class C and HP Inc. are still the two American hardware companies most affected by the rise in memory prices, ranking high on their "most fragile list." Morgan Stanley points out that Dell Technologies, Inc. Class C, HPE, and HPQ, among others, will reveal when the rise in memory costs truly begins to erode profits in the non-earnings quarter updates later this year. Historical data show that component inflation typically reflects in company performance within two to three quarters. The institution also emphasizes that in the current cycle, it prefers technology companies with higher business diversification or a larger proportion of software and warns that tight memory supply and high prices will bring higher downside risks for the industry before 2026.