Dell, HPE Shares Plunge Following Morgan Stanley Downgrade

Morgan Stanley’s downgrade of Dell and HPE reflects broader concerns about the computer hardware sector amid rising memory costs and shifting demand. The analysts pointed to an unprecedented pricing "supercycle," where hyperscalers are driving data center demand, pushing hardware valuations to all-time highs. However, this surge is coupled with rising costs in DRAM and NAND memory, which could significantly pressure hardware manufacturers’ gross margins.

Dell, in particular, was highlighted as one of the hardware companies most exposed to rising memory costs. The company’s gross margin contracted by 95 to 170 basis points during the last memory cycle. As a major customer of Nvidia, Dell builds computers around AI chips and sells them to end-users like cloud service CoreWeave. The rising costs could weigh on the PC maker's margins over the next 12 to 18 months.

This situation mirrors the memory cycle between 2016 and 2018, where increased device prices could not offset soaring input costs, leading to compressed gross margins for original equipment and design manufacturers. Companies with elevated DRAM exposure, lower pricing power, and narrower margins underperformed peers. Investors are advised to de-risk exposure to global hardware OEMs where memory is a significant input cost.

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Morgan Stanley downgraded the stocks due to concerns about rising memory costs and their impact on earnings.

DRAM (dynamic random access memory) and NAND (a flash memory) are key components in computer hardware, and their rising prices are squeezing hardware makers' margins.

A pricing "supercycle" is a period of sustained high demand and rising prices, in this case driven by hyperscalers accelerating data center demand.

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