Dell, HPE shares sink after Morgan Stanley downgrades — computer hardware stocks also hit

Shares of major data center hardware companies experienced a significant downturn on Monday, following a downgrade from Morgan Stanley that affected seven industry players, including Dell and Hewlett Packard Enterprise (HPE). The investment bank notably shifted Dell's rating from 'overweight' to 'underweight', while HPE was adjusted from 'overweight' to 'equal weight'. As a result, Dell's stock fell by 8%, and HPE saw a 7% decline. In addition to Dell and HPE, other companies such as HP Inc, Asustek, and Pegatron were also downgraded from 'equal weight' to 'underweight', with shares dipping as much as 6%. Morgan Stanley analysts commented on the current state of computer manufacturers, indicating that they are navigating through an unprecedented pricing 'supercycle'. This phenomenon is driven by hyperscalers ramping up demand for data center resources, which has inflated hardware valuations to record levels. The analysts warned that rising costs associated with DRAM and NAND memory—key components in many electronic devices—might significantly pressure profit margins. They noted that memory fulfillment rates could plummet to as low as 40% over the next two quarters. This trend emerges as a notable risk for earnings estimates in the Global Hardware OEM/ODM sector, where memory costs can constitute 10-70% of a product's overall material expenses. The surge in memory prices is largely attributed to escalating demand for AI infrastructure, which has strained supply chains. Samsung, for instance, has reportedly raised prices for its memory chips by up to 60% since September. Analysts drew parallels to the memory market cycle observed between 2016 and 2018, where spot prices for NAND and DRAM skyrocketed by 80% to 90%. Despite higher device prices, manufacturers struggled to manage soaring input costs, leading to squeezed profit margins. Dell has been specifically flagged for its vulnerability to increasing memory prices, with analysts noting a contraction in the company's gross margin by 95 to 170 basis points during the previous memory cycle. As a significant partner of Nvidia, Dell builds machines utilizing Nvidia's chips, catering to clients like cloud service provider CoreWeave. The analysts emphasized that historical trends indicate that companies facing margin pressures generally lag behind peers with similar growth profiles but more stable or expanding margins. Looking ahead, analysts predict that rising costs in DRAM and NAND will continue to impact Dell's margins over the next year and a half.