Morgan Stanley | IT Hardware: The Memory Trade – Doubling Down on Our Conviction
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Morgan Stanley reiterates its cautious stance on the IT hardware sector, warning that fundamental risks are mounting despite recent outperformance. Since February 1, a basket of memory payers, comprising hardware OEMs, consumer electronics manufacturers, and channel partners, has outpaced the S&P 500 by 13 percentage points. However, the bank views this as a short-term bounce.
DRAM contract prices surged 58% sequentially in the second quarter, while NAND contract prices soared 70%, driven largely by inelastic pricing from cloud service providers. Meanwhile, CPU inflation is emerging as a new headwind, with Intel and AMD planning 10-15% price increases. This cost pressure is cascading through the hardware supply chain, leading to substantial price hikes across servers and PCs.
Simultaneously, underlying demand is deteriorating. Notebook ODM shipments fell 13% year-on-year in the first quarter and are projected to decline another 15% in the second quarter. Traditional server demand is also weakening. Morgan Stanley expects second-half 2026 revenue and EPS to miss market consensus by 5-10%, with gross margin guidance likely disappointing investors. While spot prices currently remain 25% above contract prices, the firm argues that traditional hardware markets, including PCs and smartphones, face severe demand destruction. The report identifies second-quarter gross margin guidance and a second-half demand deterioration as critical catalysts validating their cautious outlook.