Data center stocks experienced a significant downturn on Monday following a major downgrade by Morgan Stanley, which affected several prominent hardware companies, including Dell and Hewlett Packard Enterprise (HPE). The investment bank downgraded Dell from “overweight” to “underweight” and HPE from “overweight” to “equal weight.” The market response was swift, with Dell’s shares falling by 8% and HPE’s by 7% by the end of trading.
Several other companies also faced downgrades; HP Inc., Asustek, and Pegatron were all lowered from “equal weight” to “underweight,” while Gigabyte and Lenovo received downgrades moving them from “equal weight” to “overweight.” Collectively, these companies saw their shares dip by up to 6%.
Morgan Stanley’s analysts pointed to an ongoing pricing “supercycle” affecting computer manufacturers. They noted that as demand for data centers continues to surge—largely driven by major players in the hyperscaler market—hardware valuations have reached unprecedented levels. However, the rising costs associated with DRAM (dynamic random access memory) and NAND flash memory pose risks to profit margins, especially considering that memory fulfillment rates could drop to as low as 40% over the next two quarters.
The analysts identified these challenges as potentially significant threats to earnings estimates for the global hardware Original Equipment Manufacturer (OEM) and Original Design Manufacturer (ODM) landscape, where memory costs can comprise anywhere between 10% to 70% of a product’s overall bill of materials.
Major manufacturers of DRAM and NAND memory are reportedly raising prices as demand for AI infrastructure begins to deplete memory supplies. For instance, Samsung has allegedly increased its memory chip prices by as much as 60% since September.
The analysts drew parallels to the memory price cycle from 2016 to 2018, during which NAND and DRAM prices escalated by 80% to 90%. In that period, the rising costs of components could not be offset by higher device prices, leading to compressed gross margins for original equipment and design manufacturers.
During the previous memory cycle, companies that struggled to pass on costs to consumers faced significant earnings pressure and devaluation, while those able to transfer costs to end customers fared better. Dell was specifically highlighted as particularly vulnerable to rising memory expenses, given that its gross margins contracted by 95 to 170 basis points during the last cycle. As one of Nvidia’s key customers, Dell assembles systems using Nvidia’s chips, which are then sold to cloud services like CoreWeave.
The analysts reiterated that historical trends indicate companies dealing with margin pressures tend to underperform compared to peers who maintain stable or expanding margins. Forecasts suggest that increasing costs for DRAM and NAND will continue to suppress Dell’s margins over the next 12 to 18 months, further exacerbating the challenges faced by the hardware sector.
