Morgan Stanley believes a "cost storm" triggered by soaring memory prices is sweeping across the global hardware industry.
According to a research report published on January 6 by Morgan Stanley's Erik W Woodring team following their visit to Taiwan, China, memory prices for 2026 are surging at a pace exceeding expectations. DRAM contract prices are forecast to increase by 40-70% quarter-on-quarter in Q1, while NAND prices are expected to rise by 30-35%, far surpassing previous estimates.
This cost pressure will have a profound impact on the entire hardware sector. Most OEMs are expected to implement significant price hikes in the first half of 2026 to counter these pressures, potentially leading to a full-year decline in shipments for Android smartphones and Windows PCs.
However, Apple, having secured more favorable memory prices in advance, has decided to maintain its product pricing unchanged. This strategy is expected to enable Apple to gain market share for both iPhone and Mac in 2026.
Hard drive supply shortages are intensifying, with the supply-demand gap projected to widen to 200 exabytes over the next 12 months. Server vendors like Dell and Hewlett Packard may soon initiate large-scale layoffs to protect their operating margins.
The dramatic surge in memory prices is reshaping the industry landscape.
According to the latest forecast from TrendForce, DRAM contract prices are now projected to increase by 40-70% quarter-on-quarter in Q1 2026, a stark contrast to the previous expectation of a 15-23% rise. For NAND, contract prices are anticipated to climb 30-35%, also significantly exceeding the earlier forecast of 15-25%.
This cost pressure is forcing almost all hardware OEMs, except Apple, to implement substantial price increases in the first half of 2026.
The report notes that price hike expectations have triggered advance orders from customers, which is anticipated to drive strong performance in Q4 2025 and Q1 2026. However, this is likely to be followed by weak demand in the second half of 2026.
One server OEM anticipates its general server shipments will grow 5% quarter-on-quarter in Q1 2026, a significant improvement over the typical seasonal pattern of a 10-15% decline.
The PC market is also expected to exhibit a similar pattern of a strong first half followed by a weaker second half.
Morgan Stanley believes that for the full year, shipments of Android smartphones and Windows PCs are projected to decline in 2026. Demand for general-purpose servers from enterprise customers is expected to be flat or down year-on-year.
Conversely, cloud service providers (CSPs), benefiting from robust AI server demand, are requesting their ODM partners to achieve over 30% year-on-year growth in general server shipments for 2026. This is driving the overall general server market towards an estimated approximate 10% year-on-year increase in shipments for 2026.
Apple's strategy involves maintaining market share by not raising prices.
Contrary to the industry trend, Apple has decided to keep its product prices stable in 2026, even though its product margins will also be impacted by rising memory costs.
Through its partnership agreement with Kioxia, Apple has built up NAND inventory secured at relatively favorable prices before Q1 2026. Although Kioxia may seek to renegotiate contract prices in early 2026, Apple holds an advantageous position.
Regarding DRAM procurement, Apple is still negotiating pricing with memory suppliers for Q1 2026. Because Apple locked in more favorable prices earlier, memory suppliers may impose a significant price increase on Apple in Q1 to catch up with market levels, with potential hikes exceeding 50%.
Crucially, Apple's decision to maintain stable product pricing is expected to help iPhone and Mac gain market share in 2026. Early supply chain data indicates iPhone shipments will be flat or show slight growth in 2026, while Mac shipments are forecast to increase year-on-year.
Furthermore, Apple plans to launch a low-cost MacBook priced at $599 in the first half of 2026, featuring an A19 processor, which will further aid its efforts to capture share in the PC market.
The report highlights strong iPhone performance in China, with sales growing 20-40% year-on-year in December 2025. Based on robust demand for the iPhone 17, Apple increased wafer orders to TSMC in late October and November 2025, partly due to tight supply of 3-nanometer wafers. These additional orders will be delivered over several quarters, expected in the March and June quarters.
Regarding product planning, Apple will alter its iPhone release rhythm: the iPhone 18 Pro, Pro Max, and a foldable iPhone are slated for launch in Fall 2026, while the base iPhone 18, 18e, and Air 2 will be delayed until Spring 2027. The initial full-year shipment target for the foldable iPhone is 15-20 million units, with a production target of 7-8 million units for the second half of 2026.
The hard disk drive supply crisis is escalating, with the shortage projected to widen to 200 exabytes.
The HDD supply shortage is worsening, with the projected supply gap over the next 12 months now expanded to 200 exabytes, compared to an expectation of 100-150 exabytes just three months ago.
Facing severe HDD shortages, hyper-scale cloud providers are adopting temporary measures, partially meeting storage needs by utilizing enterprise-grade solid-state drives.
However, the report notes that from a total cost of ownership perspective, eSSDs are far less efficient than HDDs, making this a stopgap measure rather than a fundamental shift in data center architecture.
Although storage chip manufacturers had attempted to reduce the cost per gigabyte of eSSDs with the aim of potentially replacing HDDs as early as 2028, the current cost gap remains substantial.
As of the end of Q4 2025, the cost per GB for NAND flash—the core of eSSDs—remained significantly above $0.10, while the average cost for HDDs was only around $0.013, making the acquisition cost of eSSDs up to 10 times higher than HDDs.
Consequently, replacing HDDs with eSSDs through the introduction of high-layer-count NAND is no longer a primary focus for storage chip manufacturers.
Notably, HDD manufacturers are reluctant to expand total capacity, but they are reallocating capacity from consumer/client applications to cloud/nearline storage demands to address growing cloud storage needs.
Seagate Technology is implementing quarterly price increases of 10% for consumer/client HDDs to align their profitability levels with the more lucrative nearline HDD business.
OEMs are adopting strategies involving layoffs and specification reductions to cope with rising costs.
Morgan Stanley believes rising cost pressures will force OEMs like Dell, Hewlett Packard, and HPE to implement significant layoffs to protect operating margins.
Echoing the memory super-cycle of 2017-2018, Dell plans to begin layoffs as early as January 2026, focusing on non-AI teams, and start using AI to enhance productivity and reduce internal team sizes. Second-tier OEMs face greater challenges due to weaker balance sheets and limited bargaining power within the supply chain.
Regarding product strategy, PC OEMs are working to reduce bill-of-materials costs. Many 512GB storage configurations are being replaced by 256GB options. OEMs are keeping prices stable for entry-level models, maintaining profitability by sharing cost increases with component suppliers or adopting cheaper components.
In memory procurement, Dell, leveraging its demand from both AI and general servers, holds a stronger bargaining position than HP. Dell and Lenovo are willing to sign long-term agreements with memory makers, while HP remains hesitant, putting it at a disadvantage in securing memory supply.
Memory manufacturers are prioritizing supply to major PC OEMs, making it harder for smaller players to obtain supply and exposing them to spot price risks.
For the AI server market, the report indicates demand is strong but profitability is thin.
xAI placed an order for 3,000 GB300 racks with Dell in late November, expected for delivery in the April quarter. Combined with an order for 1,000 racks from CoreWeave, Dell could deliver up to 4,000 GB300 racks in Q1. Orders continue to increase from other Neocloud players and sovereign AI projects.
However, AI server gross margins remain in the mid-single-digit range, with ongoing price competition among major OEMs. HPE has deprioritized its AI server business due to low margins, while Supermicro maintains competitive pricing, putting recent pressure on Dell.
