As memory prices surge and non-AI hardware demand weakens, Morgan Stanley significantly downgraded ratings for major hardware manufacturers including Dell Technologies (DELL.US), HP (HPQ.US), and Hewlett Packard Enterprise (HPE.US) on Monday, warning of intensifying margin pressures across the industry. Analysts noted the sector is experiencing a "memory super cycle," with NAND and DRAM spot prices rising 50% to 300% over the past six months. Rapidly escalating component inflation is expected to persistently drag on hardware makers' profitability through 2026. Historically, hardware OEMs' gross margins typically decline 6-12 months after memory cost increases begin. Morgan Stanley forecasts a 60-basis-point median gross margin contraction for global OEMs by 2026, contrary to market expectations of slight expansion. Dell and HP are deemed most vulnerable due to their heavy reliance on memory-intensive PC and server products, while HPE faces dual pressures from acquisition integration challenges and rising component costs.
Dell was downgraded two notches from "overweight" to "underweight" with its target price slashed from $144 to $110. Morgan Stanley cited mounting memory costs coupled with structurally lower AI server margins as near-term profit headwinds. The firm labeled Dell as "one of the stocks most exposed to memory cost increases," cutting its FY2027 gross margin forecast by 220 basis points to 18.2%. EPS estimates were reduced by ~12%, as AI server revenue growth next year may not offset overall profitability erosion.
HP's rating was cut from "equal-weight" to "underweight" with its target lowered from $26 to $24. While acknowledging stable PC replacement cycles, analysts warned DRAM/NAND price hikes would compress margins in HP's Personal Systems segment. Morgan Stanley trimmed HP's FY2026 gross margin outlook by 90 basis points to 19.7%—130 basis points below consensus—and reduced EPS estimates by 9% despite raising revenue projections to $56.5 billion.
HPE was downgraded from "overweight" to "equal-weight" with its target reduced from $28 to $25. Although its Juniper Networks acquisition could boost networking business exposure, integration complexities and component inflation are expected to limit overall profitability. FY2026 gross margin forecasts were cut by 260 basis points to 32.9%, with EPS estimates lowered from $2.52 to $2.18.
Morgan Stanley noted that while manufacturers may attempt to mitigate cost impacts through price hikes, material cost reductions, or operational efficiencies, such measures typically offset only ~70% of memory inflation pressure. Every 10% memory price increase could dent gross margins by 10-40 basis points even with mitigation efforts—or up to 130 basis points without intervention. Model simulations identify Dell and HP as the two U.S. hardware firms most exposed to memory price surges, topping Morgan Stanley's "most vulnerable" list. The firm expects Dell, HPE, and HP to reveal when memory costs begin materially eroding profits during off-season updates later this year, noting component inflation usually impacts earnings within 2-3 quarters. Morgan Stanley currently favors more diversified tech firms or those with greater software exposure, warning that tight memory supply and elevated prices pose heightened downside risks for the industry through 2026.
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