Important points
- Morgan Stanley lowered the credit rating of a leading computer hardware manufacturer because of rising memory chip prices.
- Analysts noted that NAND and DRAM semiconductor prices are experiencing a “supercycle,” affecting hardware makers’ profitability.
- Dell’s stock was the largest loser in the S&P 500 during Monday afternoon trading.
The surge in artificial intelligence has driven up memory chip prices, which is negatively impacting computer hardware companies, as highlighted in a Morgan Stanley report that downgraded major firms in the sector.
On Monday, Dell Technologies (DELL) saw its stock drop nearly 10%, leading the S&P 500 decline. Hewlett Packard Enterprise (HPE) shares fell by about 8%, and HP (HPQ) faced a drop of roughly 7%.
Why this news matters
While companies like Micron are capitalizing on the AI-driven increase in demand for memory chips, Morgan Stanley analysts caution that the escalating prices are burdening hardware producers like Dell, HP, and Hewlett Packard Enterprise. Even though hardware valuations are still near historic highs, the rising costs of components could erode profit margins.
The analysts shared with clients that the current “supercycle” in NAND and DRAM prices poses increasing risks for hardware OEM earnings all the way to 2026.
They suggested that since the valuations of hardware original equipment manufacturers (OEMs) are nearing record highs, “it might be prudent to reduce exposure” to global hardware OEMs and original design manufacturers, especially since memory represents a significant cost factor.
Morgan Stanley downgraded Dell’s stock by two levels, moving it from “overweight” to “underweight.” Consequently, HP was reduced from “equal weight” to “underweight,” and Hewlett Packard Enterprise shifted from “overweight” to “equal weight.” While several other companies also faced downgrades, the firm retained optimistic views on certain IT hardware names like Seagate Technology (STX) and Western Digital (WDC).
Interestingly, just a week ago, Morgan Stanley had labeled Micron Technology (MU) a “top pick” due to these climbing memory chip prices, with Mizuho Securities similarly supporting that view.
