Igor Golovnov | Lightrocket | Getty Images
Data center hardware stocks plunged on Monday following a series of downgrades by Morgan Stanley, citing concerns about margin pressure amid rising memory costs. Seven companies were affected, including major players like Dell and Hewlett Packard Enterprise.
The investment bank issued a double-downgrade for Dell, moving it from “overweight” to “underweight,” and downgraded HPE from “overweight” to “equal weight.”
The market reacted swiftly, with Dell shares closing down 8% and HPE shares dropping 7%.
HP Inc, Asustek, and Pegatron also faced downgrades from “equal weight” to “underweight,” while Gigabyte and Lenovo were lowered from “equal weight” to “overweight”. These announcements triggered share declines of up to 6% across the board.
Morgan Stanley’s analysts highlighted an “unprecedented pricing supercycle” driven by escalating data center demand from hyperscale cloud providers. This surge in demand has pushed hardware valuations to record levels. However, the analysts caution that this boom could be short-lived as rising costs for DRAM (dynamic random access memory) and NAND flash memory are poised to squeeze margins.
The core concern lies in the potential for reduced memory fulfillment rates, which Morgan Stanley estimates could dip as low as 40% in the coming quarters. This, coupled with escalating component prices, presents a significant headwind for hardware OEMs and ODMs.
“This is an emerging, and potentially significant, risk to CY26 earnings estimates for our Global Hardware OEM/ODM universe, where memory accounts for 10-70% of a products’ bill of materials,” the analysts stated in their report.
Major DRAM and NAND manufacturers have reportedly been increasing prices aggressively, spurred by the voracious appetite of AI infrastructure for memory. Sources indicate that Samsung, a key industry player, has raised prices for its memory chips by as much as 60% since September, according to Reuters.
Analysts drew parallels to the memory cycle of 2016-2018, during which NAND and DRAM spot prices surged by 80% to 90%. During that period, original equipment manufacturers (OEMs) and original design manufacturers (ODMs) struggled to offset rising input costs with increased device prices, resulting in compressed gross margins. This had a direct impact on stock performance.
“During this period, we saw earnings pressure and multiple de-rating from hardware stocks with elevated DRAM exposure, lower pricing power, and narrower margins, but outperformance from companies able to pass off costs to end-customers,” the analysts elaborated.
Dell was specifically identified as one of the hardware companies most vulnerable to the ongoing surge in memory costs. The analysts pointed out that Dell’s gross margin contracted by 95 to 170 basis points during the previous memory cycle, demonstrating the potential impact. Dell has positioned itself as a key builder of servers relying on Nvidia’s powerful GPUs, a relationship that makes memory cost management critical, particularly as it sells these systems to downstream data centers.
“This is important as history tells us that companies facing margin headwinds underperform peers with similar growth rates, but stable-to-expanding margins,” analysts wrote.
Looking ahead, the analysts anticipate that the elevated costs of DRAM and NAND will continue to exert downward pressure on the PC maker’s profit margins over the next 12 to 18 months, requiring proactive mitigation strategies to maintain healthy financials.
Original article, Author: Tobias. If you wish to reprint this article, please indicate the source:https://aicnbc.com/13022.html
