Dell, HPE shares sink after Morgan Stanley downgrades
Igor Golovnov | Light Rocket | Getty Images
Data center stocks took a big hit Monday after Morgan Stanley downgraded seven hardware companies. Dell And Hewlett Packard Enterprise.
The bank downgraded Dell’s rating from overweight to underweight and HPE’s rating from overweight to equal weight.
Dell and HPE fell 8% and 7%, respectively.
HP Inc., Asustek and Pegatron was also reduced from equal weight to lower weight. gigabyte And Lenovo reduced from equal weight to more than weight. Shares of all companies fell by up to 6%.
PC makers are in the midst of an unprecedented pricing “supercycle” as hyperscalers continue to drive data center demand and drive hardware valuations to all-time highs, Morgan Stanley analysts wrote.
According to the bank, rising costs in DRAM, dynamic random access memory and NAND memory, a flash memory often used in memory cards, could put pressure on business margins, especially given that memory occupancy rates could fall as much as 40% in the next two quarters.
“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 product’s bill of materials,” the analysts wrote.
Major DRAM and NAND manufacturers are increasing their prices as increasing demand for AI infrastructure continues to consume memory resources. Samsung has reportedly increased the prices of its memory chips by up to 60% since September, according to Reuters.
Analysts pointed to the memory cycle from 2016 to 2018, when NAND and DRAM spot prices increased by 80% to 90%. Rising device prices could not cover rising input costs, causing original equipment and design manufacturers to experience a contraction in gross profit margins.
“During this period, we saw earnings pressure and multiple write-downs for hardware stocks with increased DRAM exposure, lower pricing power, and tighter margins, but we outperformed companies that were able to pass costs on to end customers,” the analysts wrote.
Dell was singled out as one of the hardware companies most exposed to rising memory costs, noting that the company’s gross margin fell 95 to 170 basis points during the last memory cycle.
The company is one of them Nvidia‘s major customers and build computers around the AI giant’s chips and then sell them to end users as a cloud service CoreWeave.
“This is important because history has shown us that companies facing margin volatility underperform their peers with similar growth rates but stable, expanding margins,” the analysts wrote.
Analysts expect rising DRAM and NAND costs to negatively impact computer maker margins over the next 12 to 18 months.
