Storage chips are skyrocketing in price, hurting PC and server manufacturers! Morgan Stanley: For every 10% increase, OEM gross margin drops by 45-150 basis points.

Storage chips are skyrocketing in price, hurting PC and server manufacturers! Morgan Stanley: For every 10% increase, OEM gross margin drops by 45-150 basis points.

An unprecedented “super cycle” in storage chips is sweeping through the global technology hardware industry, casting a shadow over the profit outlook for PC and server manufacturers.

According to news from Chasing the Wind Trading Desk, Morgan Stanley warned in a report released on November 16 that the runaway surge in storage chip prices will severely erode the profit margins of hardware original equipment manufacturers (OEMs), and downgraded the ratings of several global hardware OEMs and ODMs (original design manufacturers).

The report points out that surging prices in storage chips (NAND and DRAM)—key components in PCs and servers—account for 10% to 70% of the bill of materials (BOM) in some high-end products. According to Morgan Stanley’s model calculation, if no hedging measures are taken, for every 10% rise in storage chip prices, hardware OEMs will face downward pressure of 45 to 150 basis points on gross margin. This forecast sharply contrasts with market consensus, and the firm’s earnings per share (EPS) forecast for hardware manufacturers in 2026 is now 11% below market consensus.

This round of price storm is driven by an AI-induced demand surge, the technological transition to high-bandwidth memory (HBM), and underinvestment in NAND flash memory. However, unlike before, this cycle’s price increases are faster and may last longer. Secondly, the current non-AI hardware terminal demand environment is far weaker than it was during 2016-2018. This means this cycle may result in more severe profit pressure or demand contraction than the last one, posing significant downside risk to hardware makers' earnings forecasts.

Storage “Super Cycle” Arrives, Unprecedented Price Surge

The storage chip market is experiencing an “unprecedented cycle.” According to Morgan Stanley’s data, spot prices for DRAM (dynamic random-access memory) have surged over 260% in just the past two months, and spot prices for NAND flash—core of SSDs—have risen more than 50% since the start of the year.

The driving forces behind this price surge mainly come from several aspects. First, large cloud service providers are accelerating procurement due to AI infrastructure construction; second, explosive demand for HBM used in AI accelerators is squeezing out mainstream DRAM production capacity; additionally, years of insufficient investment in NAND capacity have exacerbated supply shortages. Reportedly, storage chip order fulfillment rates in the next two quarters may drop as low as 40%.

Morgan Stanley notes that although most OEM manufacturers purchase via contracts rather than spot markets, contract prices are also facing tremendous upward pressure. The firm estimates that whether it’s NAND or DRAM, contract prices may see double-digit percentage growth each quarter before 2026. This speed and scope of price increases far exceed the last cycle (2016-2018).

History Repeats? The Lesson from 2016-2018

Looking back at the previous storage super cycle starting in 2016 offers a key benchmark for the current situation. At that time, about 6 to 12 months after storage prices began rising, OEMs’ gross margins and stock valuation multiples started to come under pressure simultaneously. Although manufacturers tried to pass costs along with price hikes, these were not sufficient to fully offset the impact, causing most companies’ gross margins to decline year-on-year for four to five consecutive quarters.

However, there are two key differences this cycle versus the last. First, the price increases are more rapid, and may last longer. Second, today’s non-AI hardware terminal demand environment is far weaker than that of 2016-2018. A Morgan Stanley CIO survey shows weak growth in enterprise hardware budgets, and most corporate executives say if equipment prices rise, they’d rather buy less than increase spending.

This combination of “soaring costs” and “weak demand” means this cycle may result in even more severe profit compression or demand shrinkage than last time, representing a major downside risk for hardware makers' earnings forecasts.

Morgan Stanley Downgrades Ratings, Multiple Giants Face Profit Warnings

Based on the above assessment, Morgan Stanley has downgraded a number of global hardware giants, saying profit and valuation will face dual pressures.

Dell Technologies: Rating downgraded from “Overweight” to “Underweight,” target price cut from $144 to $110. The report believes Dell is one of the OEMs most affected by rising storage costs; despite strong AI server business, profit pressure in higher-margin core businesses (PCs and storage) will drag down overall performance.HP Inc: Rating downgraded from “Equal Weight” to “Underweight,” target price cut from $26 to $24. The recovery in the PC market is offset by margin pressure, and its printing business continues to face challenges.Hewlett Packard Enterprise: Rating downgraded from “Overweight” to “Equal Weight,” target price cut from $28 to $25. Analysts believe the integration path after its acquisition of Juniper Networks is uncertain, with added storage cost pressures, and it lacks strong catalysts in the short term.ASUS: Rating downgraded from “Equal Weight” to “Underweight,” target price cut from NT$625 to NT$500. Its PC business relies heavily on price-sensitive consumer markets, limiting its ability to pass on costs.Lenovo Group: Rating downgraded from “Overweight” to “Equal Weight.” The report says over 60% of Lenovo’s PC business is aimed at the enterprise market, which, compared to the consumer market, is better able to absorb rising costs.

Who Is Most Vulnerable? PC and Server Manufacturers Face Biggest Risk Exposure

Morgan Stanley’s analytical framework shows different categories of hardware makers are affected differently in this round of shocks. Overall, PC and server manufacturers—whose product lines depend more on DRAM—face greater risk exposure than storage equipment makers relying more on NAND.

The report lists Dell, HP, ASUS, and Acer as the “most vulnerable” group. These companies either have a high proportion of DRAM cost in their bill of materials, or their PC business is highly focused on price-sensitive consumer markets, or their operating margins are relatively low, limiting their ability to buffer price shocks.

By contrast, Apple and Pure Storage are seen as “more resilient.” Apple can better withstand cost increases thanks to its strong supply chain bargaining power, cost control, and brand effect. Storage specialists like Pure Storage benefit from the relatively moderate pace of NAND price increases, and have stronger pricing powers.

Notably, this storm has also created winners on the other end. Morgan Stanley says chipmakers like Micron, SK Hynix, and Samsung Electronics will be the direct beneficiaries of this super cycle.

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