Semiconductor inflation has altered the landscape entirely. As memory and storage component prices rise to the point where even Apple has had to publicly increase its prices, capital markets are initially concerned about declining sales volumes and compressed profit margins.
Morgan Stanley has recently issued a series of four reports, presenting a contrarian view: while rising memory prices will indeed squeeze profit margins across the hardware industry, for leading manufacturers like Apple and Lenovo Group (SEHK: 992), the cost impact could also be transformed into opportunities for price increases, market share expansion, and even enhanced profitability.
On July 9, Morgan Stanley analyst Howard Kao published a report titled "Lenovo Group: From Memory Headwind to Structural Tailwind," upgrading the stock from "Equal-weight" to "Overweight" and significantly raising the price target to HK$30. Following the release of second-quarter PC shipment data on July 13, Morgan Stanley reiterated its "Overweight" rating and HK$30 price target for Lenovo Group.
Subsequently, Morgan Stanley analyst Erik Woodring, in a report titled "Price Increases Drive Earnings Growth," maintained an "Overweight" rating and a $360 price target for Apple, representing approximately 15% upside from the stock price at the time of the report.
The simultaneous "Overweight" ratings for Apple and Lenovo Group indicate that capital markets are reassessing the distributional outcomes of this memory chip inflation. The surge in memory prices continues, but this cost shock will not be borne equally by every company. Instead, it is driving orders, profits, and market share to concentrate towards leading manufacturers with supply security and pricing power.
The Nature of the Current Price Surge
AI infrastructure development is reshaping global memory supply and demand dynamics. HBM, DRAM, and enterprise SSDs are all being driven by demand from AI servers. Memory manufacturers are allocating more advanced process technology and production capacity to higher-margin data center products, further tightening supply for PCs and smartphones. New fabs take years from construction, equipment installation, customer qualification to volume production, making it difficult to fill the supply gap through capacity expansion in the short term.
According to prior Morgan Stanley calculations, global memory prices have surged over sixfold in the past year. By 2027, the supply gap for memory required by PCs could reach 15%, equivalent to approximately 58 million PCs; the gap for smartphone memory could reach 12%, equivalent to about 134 million phones.
The difference between this price surge and traditional memory cycles lies in the changed sources of demand and its expected duration. In the past, rising memory prices often spurred manufacturers to expand production, and end customers could delay purchases waiting for prices to fall. Today, AI data centers continue to absorb high-end capacity, and agent AI could further increase demand for server CPU, memory, and storage capacity.
AI is turning memory into a long-term supply bottleneck. Recent Morgan Stanley reports on the memory sector note that the year-on-year growth rate of memory prices, inventory changes, and the magnitude of earnings forecast revisions are approaching cyclical highs, suggesting related stocks may experience significant volatility in the near term.
However, this does not mean the memory cycle is over. AI capital expenditure and the penetration of agent AI are still driving long-term demand. Morgan Stanley estimates that related companies still have about 35% to 40% earnings growth potential by 2027 and remains optimistic on DRAM and traditional memory.
For downstream hardware manufacturers, this means waiting for costs to naturally decline is no longer a reliable strategy. Customer purchasing behavior is also changing: some channel and enterprise clients are placing orders early to avoid the next round of price hikes. In a tight supply environment, securing memory chips has become as important as the purchase price.
Profits are thus beginning to concentrate towards leading companies with supply security and pricing power.
Analysis of Apple's Position
Apple has already begun passing on storage costs to end-user prices. In June, Apple increased prices for products like MacBook and iPad. Morgan Stanley estimates that from fiscal 2025 to 2027, Apple's average DRAM and NAND procurement costs could cumulatively increase by about 370% and 280%, respectively, with previously reserved low-cost inventory only delaying the impact.
Morgan Stanley believes that Apple's price increases can not only protect profit margins but may also enhance earnings. Analysis indicates that Apple's price hikes will lead to stronger profitability.
This judgment is based on the relatively low price elasticity of Apple products. Morgan Stanley estimates the historical price elasticity for iPhone is around 0.2 to 0.5, lower than the 0.8 to 1.0 for Mac and iPad. This means a 10% price increase for iPhone might only reduce sales volume by 2% to 5%.
The performance of Mac and iPad after price increases provides initial validation. The report states that delivery lead times for these two product categories have not shown significant changes, and supply chain checks indicate iPhone production plans have remained largely stable recently. Therefore, Morgan Stanley believes recent price hikes are unlikely to materially impact demand, especially as competitors also face shortages and price increases.
The next step could involve the iPhone. Morgan Stanley sees an increasing possibility that the starting price for equivalent iPhone 18 models could be $200 higher than the iPhone 17. Their calculations show that the per-unit storage cost for the iPhone 18 Pro could increase by about $140 to $160 in fiscal 2027; if Apple aims to maintain a hardware gross margin of around 40%, a $200 price increase has a realistic basis.
Morgan Stanley expects price increases could lead to a 2% to 4% quarterly EPS uplift and raise fiscal 2027 EPS by about 1%. Product developments like Siri, Apple Intelligence, and a foldable iPhone could provide support for subsequent replacement demand.
The core rationale for Morgan Stanley's bullish view on Apple is its dual possession of pricing power towards consumers and bargaining power towards the supply chain. Apple can likely pass on some costs to consumers while leveraging its procurement scale to share pressure with non-memory suppliers, thereby maintaining margins and pursuing revenue growth during the memory price surge.
The Chinese market could be another variable. Morgan Stanley notes that progress related to the localization of Apple Intelligence in China could pave the way for the formal launch of this service. Its consumer surveys show Chinese users place significantly higher importance on smartphone AI features than users in other global markets. If AI features can restore iPhone's appeal in China's high-end market, Apple would be in a better position to absorb price increases.
Lenovo as the Preferred Choice
Among the OEM and ODM companies covered by Morgan Stanley, Lenovo Group is the preferred pick. The Morgan Stanley team led by analyst Howard Kao points out that Lenovo's higher proportion of commercial PCs, larger procurement scale, and continuously improving profitability in its Infrastructure Solutions Group (ISG) are factors that can help drive margin expansion even as component costs rise.
Recent market data partially supports this view. IDC data shows Lenovo's PC shipments for Q2 2026 were 16.6 million units, up 1% sequentially but down 2% year-on-year. Excluding workstations, desktop and notebook shipments were 16.1 million units, 1% and 2% higher than Morgan Stanley's forecast and market consensus, respectively. Morgan Stanley expects Lenovo's market share to further increase to around 26% in fiscal 2027.
The importance of supply security is also rising. Howard Kao notes that "ensuring access to memory supply has become at least as important as the purchase price." Lenovo's PC shipment scale, long-term supplier relationships, global manufacturing system, and access to China's domestic memory supply chain help it secure more components during tight supply. In contrast, smaller manufacturers may face both rising procurement costs and insufficient supply.
Recently, Gartner updated its 2026 Top 25 Global Supply Chain ranking, with Lenovo Group placing fifth. Globally, Lenovo firmly holds the top spot for supply chain in Asia-Pacific. Since the inception of the Gartner ranking, Lenovo Group has been listed 12 times, the highest cumulative number among Chinese companies, and has been in the global top ten for five consecutive years. Entering the global top five signifies that Lenovo Group's supply chain capabilities have further advanced into the ranks of global leading enterprises, continuously setting a new historical high ranking for Chinese companies on this list.
The Morgan Stanley report suggests that some Q2 shipments came from pre-price hike advance purchases, and the dampening effect of memory costs on end-demand may start to show from the second half of 2026. It forecasts Lenovo's PC shipments may decline by about 9% in fiscal 2027. However, driven by rising average selling prices and improved product mix, PC revenue could still grow by about 8% to $55 billion, with operating margin maintained at around 7.7%, corresponding to operating profit of approximately $4.3 billion.
The report states that Lenovo Group will prioritize protecting profitability rather than sacrificing margins to maintain shipment volume.
ISG's Impact on Valuation
It is estimated that by fiscal 2029, ISG will contribute about 35% of Lenovo Group's profits. Morgan Stanley forecasts Lenovo's ISG revenue will increase from $19.2 billion in fiscal 2026 to $33.3 billion in fiscal 2027, a year-on-year growth of about 74%; potentially reaching $43 billion and $54.3 billion in fiscal 2028 and 2029, respectively.
This forecast is based on enterprise server demand, hyperscale data center investment, AI server deployment, and rising system average selling prices. Lenovo Group has publicly disclosed it currently holds approximately RMB 140 billion in AI server backlog orders; market sources suggest its delivery volume next year could exceed RMB 200 billion, representing conversion rates and order data exceeding expectations.
As scale expands and product mix improves, Morgan Stanley expects ISG's operating margin to rise from 0.4% in fiscal 2026 to 4.6% in fiscal 2027, with operating profit increasing from $73 million to about $1.5 billion. By fiscal 2029, ISG's operating margin could reach 6.9%.
Morgan Stanley points out that as ISG's profit contribution increases, the valuation reference for Lenovo Group is gradually expanding from a traditional PC manufacturer to include AI infrastructure and AI solution companies.
This is also a key distinction between Lenovo Group and general PC manufacturers. Price increases for memory, GPUs, and other components push up the average selling price of server systems, and companies with stronger supply security capabilities can secure more orders and amplify revenue scale.
Based on this, Morgan Stanley forecasts Lenovo's fiscal 2027 revenue will reach $99.2 billion, with adjusted net profit of approximately $2.97 billion. By fiscal 2029, revenue could increase to $122.3 billion, with the net profit margin rising from 2.3% in fiscal 2026 to 3.7%. Simultaneously, Morgan Stanley's EPS forecasts for Lenovo for fiscal 2027 to 2029 are about 20% higher than market consensus. This difference stems not from more aggressive revenue assumptions but from higher margin forecasts.
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