Why is the storage gap difficult to fill? Morgan Stanley: Insufficient cleanrooms and limited lithography machine capacity make expansion impossible.

The AI computing power arms race is pushing the storage chip market into a structural shortage, and this gap will remain unsolvable for years to come.

According to Chasing Wind Trading Desk, Morgan Stanley pointed out in its latest research report released on June 3 that DRAM has become the core bottleneck in the expansion of AI infrastructure, and NAND supply is also extremely tight. The supply-demand imbalance is expected to last 2 to 3 years or even longer.

The report significantly raised target prices for Micron and SanDisk, with Micron’s target price rising from $520 to $1050, and SanDisk’s target price increasing from $1100 to $1750. Both stocks maintain an overweight rating.

Morgan Stanley analyst Joseph Moore emphasized in the report that the core obstacle restricting supply expansion is not capital willingness, but a physical hard constraint—insufficient cleanroom capacity and limited supply of EUV lithography machines mean that even if storage manufacturers intend to expand production massively, the actual implementation speed will be strictly limited. This judgment directly supports Morgan Stanley's core thesis of a "longer, higher peak" profit cycle for memory stocks, and prompted a 48% upward revision of its CY2027 earnings per share forecast for Micron.

Physical Ceiling for Supply Expansion

Morgan Stanley’s report clearly points out that the reason why this round of memory shortage has “no quick solution” is fundamentally due to two unavoidable physical bottlenecks: lengthy cleanroom construction cycles and limited production of EUV extreme ultraviolet lithography machines.

The construction of cleanrooms usually takes several years from planning to production, which means that even if storage manufacturers start expansion now, new capacity is unlikely to provide effective supply in the short term. At the same time, EUV lithography machines, as key equipment for advanced process storage production, are themselves strictly constrained globally, further narrowing manufacturers’ ability to respond quickly to market demand.

Morgan Stanley points out in the report that DRAM bit supply growth will accelerate in 2027-2028 as new production capacities come online, but the overall pace remains limited by construction lead times and ramp-up periods. In addition, HBM (High Bandwidth Memory) production’s high wafer consumption ratio continues to structurally squeeze available supply for regular DRAM.

DRAM: The Core Bottleneck of AI Infrastructure

Morgan Stanley identifies DRAM as the “primary bottleneck” in the current expansion of AI infrastructure, with hyperscale cloud vendors’ purchasing enthusiasm remaining strong and their willingness to pay premiums consistently high.

The report forecasts DRAM prices will rise 40% sequentially in the May quarter and another 15% in the August quarter. Morgan Stanley notes that price increase expectations heard from supply chain interviews in Taiwan are even higher—some supply chain participants predict a single quarter increase reaching 20% or more—but Morgan Stanley adopts a relatively conservative assumption and cautions that not all businesses will reprice simultaneously with quarterly adjustments.

Based on higher pricing assumptions, Morgan Stanley raised Micron’s adjusted CY2026/CY2027 earnings per share forecasts by 4% and 48% respectively, with new projections of around $20 per share (F3Q26 quarterly) and $113.85/share (CY2027 full year), both significantly above market consensus.

NAND Also Stretched, SanDisk Benefits from Cloud Demand

The supply-demand structure in the NAND market is also tight. Morgan Stanley points out that hyperscale cloud vendors are continuously seizing shares in high-performance NAND, and this trend is structurally reshaping the demand profile for this category, with supply-side adjustments obviously lagging behind.

SanDisk’s joint venture partner Kioxia recently raised its long-term bit growth expectation only slightly from 20% to 22% at its investor day, and keeps capital expenditure plans low, at about 470 billion yen per year. Morgan Stanley believes that Kioxia’s conservative expectations for demand in smartphones and PCs are the main reason for its restrained capital expenditure.

Despite weak demand for mobile and PC ends, Morgan Stanley stresses that this has not dragged down the overall pricing environment for NAND. The report raises SanDisk’s CY2026/CY2027 earnings per share forecast by 12% and 24% respectively, with higher pricing as the main driver. The target price for SanDisk is raised to $1750, based on 28x cross-cycle earnings per share of $62.50.

Valuation Still Has Room, Multiple Catalysts Await

Although Micron and SanDisk share prices have far outperformed the market in 2025 and continue into 2026, Morgan Stanley believes that the strong rally is not over yet.

The report notes that both stocks’ CY2027 expected PE ratio is below 10, valuations remain reasonable and further expansion is possible. Morgan Stanley believes that as investors increasingly price in longer-lasting profitability, rising valuation multiples may become a greater driver of future returns.

Recent catalysts listed by Morgan Stanley include: HBM contract renegotiations in the second half of 2026, a stock repurchase plan commencing in 2027 (Morgan Stanley expects Micron to repurchase up to $50 billion in FY2027-FY2028), and continued improvement of SanDisk’s data center market penetration.

For the hotly debated Long-Term Agreement (LTA) in the market, Morgan Stanley classifies it as the result, not the cause, of high-level sustained expectations. It believes hyperscale cloud vendors have proactively made strategic commitments to lock in future supply, which itself proves long-term demand certainty.

Capital Expenditure Expands Sharply, Depreciation Pressure Manageable

Morgan Stanley’s forecast for Micron’s capital spending is far above market consensus. The report expects Micron’s FY2027/FY2028 capex to be $44 billion and $40 billion, versus consensus of $37.6 billion and $36.9 billion respectively.

Morgan Stanley admits that higher capital expenditure will drag on free cash flow, but its detailed depreciation and amortization model shows the incremental shock to D&A is financially digestible. Meanwhile, the bit growth brought by new capacity, under a persistently tight market, is expected to translate into extra revenue and upside for earnings per share.

Morgan Stanley raised Micron’s target price to $1050, based on 29.5x cross-cycle EPS of $35, comparable to overall semiconductor sector valuation levels, and uses average profitability from FY2021 to FY2028 as the cross-cycle profit benchmark.

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