Once regarded as a "bearish voice" in the Korean market, Morgan Stanley analyst Shawn Kim has released a new report on the memory industry, stating that the most severe phase of the current market correction is "nearing its end." He believes current valuations now offer an "attractive tactical entry point."
Kim suggests that the market's focus for memory stocks is shifting from a price cycle to a focus on capital returns, with share buybacks, free cash flow, and long-term supply agreements (LTAs) set to become the next catalysts for share prices. Morgan Stanley has maintained its target prices for both Samsung Electronics and SK hynix. However, the firm has raised its 2026 earnings per share (EPS) estimate for SK hynix by 13%, while lowering its 2026 EPS estimate for Samsung Electronics by 10%. Despite the divergence, the target prices for both companies imply over 60% upside from current share prices.
Shawn Kim described this recent correction as a "small ripple in the AI super-cycle." He maintains a long-term bullish stance on both Samsung Electronics and SK hynix, forecasting earnings growth of 25% to 50% for both companies by 2027. He attributes this to the continued expansion of AI capital expenditure and the rapid advancement of Agentic AI, which will collectively support industry fundamentals.
The Correction is Nearing Its End
Morgan Stanley was among the first to issue a warning in early July, cautioning that memory stocks could face a short-term pullback due to the second derivative of DRAM price gains peaking, combined with overly concentrated market positioning. Subsequently, the memory sector experienced significant volatility and selling pressure in July, with the Kospi index and giants like Samsung Electronics and SK hynix undergoing substantial corrections. This downturn not only validated Morgan Stanley's warning about slowing price momentum but also coincided with the liquidation of highly leveraged AI hedge funds and a deleveraging of retail margin loans.
However, Shawn Kim believes that after the recent correction, valuations for memory stocks have improved significantly. Currently, memory stocks are trading at approximately 3 times next twelve months (NTM) P/E, which he argues reflects almost no long-term growth premium. The report notes that the peak rate of change in the breadth of earnings estimate revisions for memory has receded from its extreme levels seen in late June, suggesting the most pessimistic period may have passed.
Following the significant unwinding in July, capital has begun to flow back into the market. Morgan Stanley anticipates that in the short term, market preference will remain concentrated on areas most benefiting from AI capital expenditure, including DRAM and niche memory types (DDR4, SLC NAND), as opposed to memory module makers.
AI Demand Cycle's Scale is Unprecedented, Offering Room for Valuation Multiple Expansion
Morgan Stanley emphasized that AI-driven demand is not contradictory to the traditional memory cycle. In the current AI build-out cycle, the year-on-year increase in DRAM prices has reached as high as 700%, roughly seven times the peak of historical price cycles, and the cycle's duration is unusually long. DRAM has become a key bottleneck in AI infrastructure construction.
Kim argues that AI-driven demand is more likely to represent a structural change rather than a simple cyclical fluctuation. If investors begin to believe that AI will extend the industry's earnings cycle, the traditional framework of valuing memory as a cyclical stock may no longer be applicable, leaving room for valuation multiple expansion.
Furthermore, the report indicates that while the market has already priced in the risk of slowing EPS growth over the next 12 months, there is a general lack of confidence regarding what will drive EPS higher in 2028. This divergence is the core logic behind Shawn Kim's belief that there is still room for valuation recovery.
Stock Adjustments: SK Hynix Upgraded, Samsung Downgraded
For individual companies, Morgan Stanley has made opposite adjustments to its earnings estimates for the two Korean memory giants. The 2026 EPS estimate for SK hynix was raised by 13%, primarily reflecting the positive impact of asset disposal gains in the second quarter. Conversely, the 2026 EPS estimate for Samsung Electronics was lowered by 10% due to persistent weakness in its consumer electronics business. Adjustments to earnings forecasts for 2027 and 2028 were relatively limited for both companies.
Despite the divergence in earnings estimates, Morgan Stanley has maintained its target prices for both companies, emphasizing that the targets imply over 60% upside from current share prices. The report suggests that as the cycle enters its later stages, companies will more actively communicate their capital return plans and demonstrate greater capital discipline in monetizing massive capital expenditures, which will support a market re-rating of the entire industry.
Industry Survey: Q3 Prices Slightly Below Expectations, Capacity Shifting to eSSD
According to Morgan Stanley's latest industry survey, DRAM contract prices in the third quarter of 2026 saw a sequential increase of approximately 15% in early trading, slightly below the previously estimated 20%. NAND prices rose by about 20% sequentially. As the trend of incremental pricing slows in the fourth quarter, the urgency for customers to pre-order has decreased, and the incentive to lock in low-cost inventory has weakened.
On the supply side, the report expects more capacity to shift from consumer products to enterprise SSDs (eSSD), aligning with the continued growth in AI server demand, which is expected to effectively absorb new supply. Morgan Stanley believes the memory industry will transition to the later stages of the cycle in the fourth quarter of 2026. At that point, the core logic driving stock prices will shift from operational leverage through price increases to earnings stability from capital returns and long-term supply agreements, as well as sustainable free cash flow generation.
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