Storage sell-off is a "fake drop"? Morgan Stanley: All so-called negative news is old and well-known, buy the "golden pit" at the dip!

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U.S. storage stocks have recently experienced sell-offs, but Morgan Stanley believes that several bearish factors which the market is worried about were already foreseeable a month ago and do not represent new risks. The supply-demand tension in the data center sector has not eased at all. Morgan Stanley maintains a positive view of the storage sector, characterizing the recent pullback as an attractive buying window.

According to Chasewind Trading Desk, Morgan Stanley's research report released on July 20 states that after intensive visits to data center procurement channels last week, analyst Joseph Moore and his team confirmed that the severity of the storage shortage shows no signs of easing. Morgan Stanley estimates that third-quarter data center memory prices have risen at least 25% compared to similar products in the second quarter, exceeding previous forecasts by both Morgan Stanley and third-party agencies.

Morgan Stanley points out that the core logic of this round of storage cycle is that memory is increasingly becoming one of the main bottlenecks in AI infrastructure construction, and this structural constraint is expected to persist for years. In this context, Morgan Stanley believes that the risk-reward of storage stocks is quickly catching up with previously favored stocks like Nvidia and Broadcom, and the current sell-off has created a strong entry opportunity.

Bearish factors are not new, market overreacted

Morgan Stanley explicitly states that the main concerns dragging down storage stocks recently—slowing second derivative of growth, rising capital expenditure, customers downgrading specs (de-speccing)—were ‘open cards’ a month ago, and do not constitute new fundamental changes.

Regarding price growth, Morgan Stanley admits the second derivative slowdown is an objective fact, but stresses it was inevitable. According to SIA data, DRAM prices rose about 70% quarter-on-quarter in Q1, and over 40% in Q2. Morgan Stanley notes that with quarterly revenue in the storage industry having surged from about $46 billion a year ago to over $200 billion, it is impossible to maintain such increases, and doing so would be destructive to demand. "Everyone was aware of this weeks before the stock prices peaked," Morgan Stanley writes.

Regarding long-term agreements (LTA), Morgan Stanley believes their significance lies more in confirming the supply-demand tension revealed by channel research, rather than forming a hard constraint on prices. Morgan Stanley also notes that Micron's statement in its earnings call that "Q2 prices may represent the cap of some new agreements" is a relatively conservative wording—according to industry channel information, these agreements are likely old ones already reached in principle with a long legal approval cycle, while new agreements under negotiation will have higher price caps.

Data center shortages intensify, AI demand is the core driver

Morgan Stanley emphasizes that this round of storage cycle is fundamentally different from previous ones: demand is almost entirely driven by data centers, with mixed signals from consumer, PC, and smartphone markets being "false signals" and should not be regarded as a basis for cyclical reversal.

Morgan Stanley states that cloud customers are paying premiums for six-cycle futures above expected Q2 prices to expedite memory access—"Do we think these customers are paying premiums just to stockpile inventory in warehouses?" Morgan Stanley rhetorically asks. This directly confirms that the supply-demand squeeze is not inventory-driven, but rather a genuine production bottleneck.

On the demand side, Morgan Stanley notes that AI computing power spending is increasing by more than 50%, far higher than the annual growth of 3% to 5% in PC and smartphone markets, and as AI continues to expand its share in overall demand, this gap will become even more pronounced. The manufacturing complexity of HBM4 will consume a large amount of capacity, and once the Rubin Ultra platform launches next year, the HBM memory capacity will double; meanwhile, demand for rack low-power DDR5 and enterprise storage is equally robust. In terms of NAND, Morgan Stanley notes that industry capital expenditure remains unusually restrained, and although it may increase slightly next year, it will not be enough to significantly expand supply.

Duration of the cycle is more important than the peak magnitude

Morgan Stanley believes that the focus of current market debate should shift from "how high peak profits can be" to "how long high profits can last," as the latter provides more significant support for valuation.

Morgan Stanley notes that long-term agreements and customer engineering optimizations compress the amplitude of the cycle to a certain extent, but at the same time extend its duration. "Several years of earnings rising steadily from current operating levels may support high valuations more than a single super-strong year," Morgan Stanley writes.

Regarding the risk of downgrading specs, Morgan Stanley admits that Nvidia has significantly cut LPDDR5 memory usage in racks, and is promoting broader restructuring of computing power, working memory, and storage architecture to optimize memory constraints. But Morgan Stanley believes that the underlying logic of these actions is precisely that "memory shortages will persist for years"—this is a signal, not a negative. As supply gradually releases, memory usage will inevitably expand in tandem.

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The above highlights are from Chasewind Trading Desk.

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