As memory prices surge significantly and demand for non-AI hardware weakens, Morgan Stanley sharply downgraded its ratings on major hardware vendors including Dell Technologies (DELL), HP Inc. (HPQ), and Hewlett Packard Enterprise (HPE) on Monday, warning that the entire industry is facing increasing margin pressure. Analysts pointed out that the industry is currently in a “memory super cycle,” with NAND and DRAM spot prices rising approximately 50% to 300% over the past six months. This rapidly heating component inflation is expected to persistently drag on hardware manufacturers’ profitability, with the impact continuing into 2026.
Dell and HP are seen as the most sensitive companies to rising memory prices due to their high reliance on memory-intensive PC and server products. Dell’s rating was downgraded two notches consecutively from “Overweight” to “Underweight,” with its target price reduced from $144 to $110. Rising memory costs, combined with the structurally lower margins of AI servers, are putting pressure on the company’s short-term profit outlook. Morgan Stanley significantly lowered its gross margin forecast for fiscal year 2027 to 18.2%, 220 basis points lower than previous expectations, and cut the company’s EPS forecast by approximately 12%.
HP’s rating was downgraded from “Equal-weight” to “Underweight,” with its target price lowered from $26 to $24. While analysts acknowledge that the PC replacement cycle is becoming more solid, rising DRAM and NAND prices will squeeze the profit margins of the company’s Personal Systems business. Morgan Stanley lowered its gross margin forecast for fiscal year 2026 by 90 basis points to 19.7%, 130 basis points below market consensus. Although the revenue expectation for that fiscal year was raised to $56.5 billion, the EPS forecast was still cut by 9%.
Hewlett Packard Enterprise faces dual pressures from acquisition integration challenges and rising component costs. Its rating was lowered from “Overweight” to “Equal-weight,” with the target price reduced from $28 to $25. Although the acquisition of Juniper Networks is expected to increase the proportion of the company’s networking business, the integration process and rising component costs will limit overall profitability. The gross margin forecast for fiscal year 2026 was cut by 260 basis points to 32.9%, and EPS was reduced from $2.52 to $2.18.
Historical experience shows that hardware OEMs’ gross margins typically decline within 6 to 12 months after memory costs begin to rise. Morgan Stanley expects the median global OEM gross margin to decline by 60 basis points in 2026, while the general market expectation remains a slight expansion. Even if manufacturers attempt to mitigate the cost impact by raising selling prices, reducing other material costs, or lowering operating expenses, they can typically only offset about 70% of the memory inflation pressure.
Modeling suggests that Dell and HP remain the two US hardware companies most impacted by memory price increases. These vendors will reveal in their non-earnings season updates later this year when rising memory costs truly begin to erode profits. Historical data indicates that component inflation usually reflects in corporate earnings within two to three quarters. In the current cycle, analysts prefer technology companies with higher business diversification or a greater proportion of software, warning that tight memory supply and high prices will bring higher downside risks to the industry before 2026.
