An unprecedented "super cycle" in memory chip prices is sweeping through the global tech hardware industry, casting a shadow over the profit outlook for personal computer (PC) and server manufacturers.

Morgan Stanley warned in a November 16 report that the runaway surge in memory chip prices will severely erode the profit margins of hardware original equipment manufacturers (OEMs). The bank downgraded ratings for multiple global hardware OEMs and original design manufacturers (ODMs).

The report highlights that soaring prices of memory chips (NAND and DRAM), which are critical components for PCs and servers, account for 10%-70% of the bill of materials (BOM) for some high-end products. According to Morgan Stanley's model, a 10% increase in memory chip prices could pressure hardware OEMs' gross margins by 45 to 150 basis points if no hedging measures are taken. This forecast sharply contrasts with market consensus, as the bank's 2026 earnings per share (EPS) estimates for hardware makers are already 11% below general expectations.

This price surge is driven by surging AI demand, the shift to high-bandwidth memory (HBM) technology, and underinvestment in NAND flash production. Unlike previous cycles, this one is characterized by faster price hikes and potentially longer duration. Additionally, non-AI hardware demand is significantly weaker than during the 2016-2018 period. This combination of soaring costs and weak demand could lead to more severe profit compression or demand contraction, posing major downside risks to hardware manufacturers' earnings forecasts.

**Memory "Super Cycle" Arrives with Unprecedented Price Hikes** The memory chip market is experiencing an "unprecedented cycle." Morgan Stanley data shows DRAM spot prices have surged over 260% in just two months, while NAND flash prices—key to solid-state drives (SSDs)—have risen more than 50% since the start of the year.

Key drivers include accelerated procurement by cloud service providers for AI infrastructure, explosive demand for HBM in AI accelerators (diverting DRAM capacity), and years of underinvestment in NAND production. Reports suggest memory chip order fulfillment rates may drop as low as 40% in the next two quarters.

Morgan Stanley notes that while most OEMs procure via contracts rather than spot markets, contract prices also face steep upward pressure. The bank expects both NAND and DRAM contract prices to post double-digit percentage growth every quarter through 2026—far exceeding the pace of the 2016-2018 cycle.

**History Repeating? Lessons from 2016-2018** The 2016-2018 memory super cycle offers a reference: OEM margins and valuation multiples came under pressure 6-12 months after price hikes began. Despite attempts to pass costs to customers, most companies saw year-over-year gross margin declines for 4-5 consecutive quarters.

However, this cycle differs in two ways: prices are rising faster and may persist longer, while non-AI hardware demand is weaker than in 2016-2018. Morgan Stanley's CIO survey reveals sluggish enterprise hardware budget growth, with most executives preferring to cut purchases rather than raise budgets if prices increase.

This "cost surge meets weak demand" dynamic could trigger deeper profit squeezes or demand drops than last time, significantly heightening downside risks for hardware makers.

**Downgrades Hit Major Players** Morgan Stanley downgraded several global hardware giants, citing dual pressure on profits and valuations:

- **Dell Technologies**: Cut from "Overweight" to "Underweight," target price slashed from $144 to $110. Despite strong AI server sales, its higher-margin core businesses (PCs, storage) face severe margin pressure. - **HP Inc.**: Downgraded from "Equal-Weight" to "Underweight," target reduced from $26 to $24. PC market recovery benefits are offset by margin pressures, while its printing business struggles. - **Hewlett Packard Enterprise**: Lowered from "Overweight" to "Equal-Weight," target trimmed from $28 to $25. Juniper Networks integration uncertainty and memory cost pressures cloud near-term catalysts. - **ASUS**: Downgraded from "Equal-Weight" to "Underweight," target cut from NT$625 to NT$500. Its consumer-focused PC business has limited cost-pass-through ability. - **Lenovo Group**: Moved from "Overweight" to "Equal-Weight." Over 60% of its PC sales target enterprises, which can better absorb cost hikes than consumers.

**Who’s Most Vulnerable? PC & Server Makers at Highest Risk** Morgan Stanley’s analysis shows PC and server makers—more reliant on DRAM—face greater exposure than storage device manufacturers dependent on NAND. Dell, HP, ASUS, and Acer are flagged as "most vulnerable" due to high DRAM cost shares in BOMs, exposure to price-sensitive consumers, or thin operating margins.

In contrast, Apple and Pure Storage are deemed "more resilient." Apple’s supply chain leverage, cost controls, and brand strength help mitigate cost pressures, while Pure Storage benefits from milder NAND price hikes and stronger pricing power.

Notably, memory chipmakers like Micron, SK Hynix, and Samsung Electronics emerge as direct winners of this super cycle.