The AI computing arms race is propelling the memory chip market into a structural shortage, a gap expected to remain unresolved for several years.

In a research report published on June 3, Morgan Stanley identified DRAM as the core bottleneck for AI infrastructure expansion, with NAND supply also extremely tight. This imbalance between supply and demand is projected to persist for two to three years or even longer.

The report simultaneously raised its price targets for Micron Technology and SanDisk. The target for Micron Technology was increased from $520 to $1,050, while SanDisk's target was lifted from $1,100 to $1,750. Both stocks maintained an Overweight rating.

Analyst Joseph Moore emphasized in the report that the core constraint on supply expansion is not a lack of capital willingness but rather physical hard constraints—insufficient cleanroom capacity and limited EUV lithography machine supply. These factors severely restrict memory manufacturers' ability to rapidly scale production even if they intend to do so. This assessment directly supports Morgan Stanley's core thesis of a "longer and higher peak" in the memory profit cycle and led them to raise their CY2027 earnings per share estimate for Micron Technology by 48%.

The Physical Ceiling on Supply Expansion

The report clearly states that the reason there is "no quick fix" for this memory shortage lies in two unavoidable physical bottlenecks: lengthy cleanroom construction cycles and constrained production capacity for EUV lithography machines.

Building a cleanroom, from planning to operation, typically takes several years. This means that even if memory manufacturers initiate expansion plans now, new capacity will struggle to become effective supply in the short term. Simultaneously, EUV lithography machines, essential for advanced process memory production, are themselves in limited global supply, further restricting manufacturers' ability to respond swiftly to market demand.

Morgan Stanley notes that bit supply growth for DRAM will accelerate in 2027-2028 as new capacity gradually comes online, but the overall pace will still be constrained by construction timelines and production line ramp-up periods. Additionally, the high wafer consumption ratio for HBM (High Bandwidth Memory) production continues to structurally compress the available supply for standard DRAM.

DRAM: The Core Bottleneck for AI Infrastructure

Morgan Stanley characterizes DRAM as the "primary bottleneck" for current AI infrastructure expansion, with purchasing intent from hyperscale cloud providers remaining robust and their willingness to pay premiums staying high.

The report forecasts DRAM prices to increase by 40% quarter-over-quarter in the May quarter, followed by a further 15% rise in the August quarter. The firm notes that pricing expectations heard in its Taiwan supply chain checks are even higher—some supply chain participants anticipate single-quarter increases of 20% or more—but Morgan Stanley is using a relatively conservative assumption, cautioning that not all business will be repriced simultaneously on a quarterly basis.

Based on these higher pricing assumptions, Morgan Stanley raised its adjusted EPS estimates for Micron Technology for CY2026 and CY2027 by 4% and 48%, respectively. The new forecasts are approximately $20 per share (F3Q26 single quarter) and $113.85 per share (CY2027 full year), both significantly above market consensus.

NAND Also Under Strain, SanDisk Benefits from Cloud Demand

The supply-demand dynamics for the NAND market are also tight. Morgan Stanley points out that hyperscale cloud providers are continuously capturing share of high-performance NAND, a trend that is structurally reshaping demand for this category, while supply-side adjustments are clearly lagging.

SanDisk's joint venture partner, Kioxia, only modestly raised its long-term bit growth forecast from 20% to 22% at a recent investor day, while maintaining a low capital expenditure plan of around ¥470 billion annually. Morgan Stanley believes Kioxia's conservative outlook for smartphone and PC market demand is the main reason for its restrained capital spending.

Despite softness in mobile and PC demand, Morgan Stanley emphasizes this has not weighed on the overall NAND pricing environment. The report raised its EPS estimates for SanDisk for CY2026 and CY2027 by 12% and 24%, respectively, also driven primarily by higher pricing. Morgan Stanley increased SanDisk's price target to $1,750, based on a valuation framework of 28 times its through-cycle EPS of $62.50.

Valuation Still Has Room, Multiple Catalysts Await

Although shares of Micron Technology and SanDisk have significantly outperformed the market in 2025, a trend continuing into 2026, Morgan Stanley believes the strong run is not over.

The report notes that both stocks are trading below 10 times CY2027 earnings estimates, with valuations still in a reasonable range and potential for further expansion. The firm believes that as investors gradually price in longer-lasting profitability, multiple expansion could become a larger driver of future returns.

Near-term catalysts listed by Morgan Stanley include: HBM contract renegotiations in the second half of 2026, the initiation of share buyback programs starting in 2027 (the firm expects Micron Technology to repurchase $50 billion in shares between FY2027 and FY2028), and SanDisk's continued penetration in the data center market.

Regarding the much-discussed Long-Term Agreements (LTAs), Morgan Stanley characterizes them as an outcome, not a cause, of the expectation for sustained high prices. They are seen as strategic commitments made proactively by hyperscalers to secure future supply, which in itself confirms the long-term certainty of demand.

Significant Capex Expansion, Depreciation Pressure Manageable

Morgan Stanley's forecast for Micron Technology's capital expenditure is significantly higher than market consensus. The report expects Micron's capex for FY2027 and FY2028 to be $44 billion and $40 billion, respectively, compared to consensus estimates of $37.6 billion and $36.9 billion.

The firm acknowledges that higher capex will weigh on free cash flow, but its detailed depreciation and amortization model indicates the incremental impact from D&A is financially digestible. Meanwhile, the bit growth from new capacity, under a scenario of continued market tightness, is expected to translate into additional revenue and EPS upside.

Morgan Stanley raised its price target for Micron Technology to $1,050, based on 29.5 times a through-cycle EPS of $35, which is in line with the overall semiconductor sector's valuation level. The firm used the average profitability from FY2021 to FY2028 as the through-cycle earnings benchmark.