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Data center stocks took a big hit Monday after Morgan Stanley downgraded seven hardware companies. Dell and hewlett packard enterprise.
The bank double-downgraded Dell from overweight to underweight, and downgraded HPE from overweight to equal weight.
Dell and HPE fell 8% and 7%, respectively.
HP company, Asstech Pegatron was also downgraded from the same weight to underweight, gigabyte and lenovo I was reduced from equal weight to overweight. Stock prices for all companies fell by up to 6%.
Analysts at Morgan Stanley write that computer makers are in the midst of an unprecedented pricing “supercycle” as hyperscalers continue to fuel data center demand and hardware valuations reach record highs.
The bank said rising costs for DRAM, dynamic random access memory, and NAND memory, which is flash memory typically used in memory cards, could put pressure on companies’ margins, especially as memory fulfillment rates could fall to as much as 40% over the next two quarters.
“This is a new and potentially significant risk to our 2026 revenue forecast in our global hardware OEM/ODM space, where memory accounts for 10-70% of the product bill of materials,” the analysts wrote.
Major DRAM and NAND manufacturers are raising prices as memory supplies continue to dry up due to rising demand for AI infrastructure. According to Reuters, Samsung has reportedly increased the price of its memory chips by up to 60% since September.
Analysts pointed to the 2016-2018 memory cycle, when spot prices for NAND and DRAM rose 80% to 90%. Higher device prices were unable to offset higher input costs, and original equipment and design manufacturers experienced gross margin compression.
“During this period, we saw earnings pressure and multiple downgrades from hardware stocks due to rising DRAM exposure, reduced pricing power, and compressed margins, but companies that were able to pass costs on to end customers outperformed,” the analysts wrote.
Dell was noted as one of the hardware companies most exposed to rising memory costs, noting that its gross margins shrank by 95 to 170 basis points during the last memory cycle.
The company is one of them Nvidiaacquire major customers, build computers around the AI giant’s chips, and sell them to end users such as cloud services. coreweave.
“This is important because history shows that companies facing margin headwinds underperform their peers with similar growth rates but stable to expanding margins,” the analysts said.
Analysts expect rising costs for DRAM and NAND to weigh on PC makers’ profits over the next 12 to 18 months.
