Morgan Stanley disclosed on Monday that the recent pullback in memory stocks has created a favorable opportunity for exposure to companies benefiting from persistent chip shortages. Though prices for memory components have increased by about 25% at the start of Q3, the trend is at a slower pace than what was seen in recent periods.
A surge in demand for memory and storage, driven by AI data centers, has strained supply over the past year, contributing to higher costs throughout the sector. Suppliers are currently bolstering production capacity to meet demand, while buyers are signing multi-year contracts to lock in supply and price stability.
Concerns were raised among investors that this expansion of manufacturing capacity and the shift to longer-term purchasing agreements could weigh on prices, limiting the robust profit growth memory suppliers have recently experienced, while high prices and severe shortages are prompting memory buyers to “de-spec,” or redesign products to use less memory.
While analysts acknowledge that long-term agreements may reduce the volatility of the memory cycle, they maintain that such contracts are ultimately supportive of stock valuations over the long term. They argue that while “de-speccing” could impact pricing to a degree, the extent to which buyers are restructuring products demonstrates memory’s ongoing strategic importance and underpins sustained demand.
Morgan Stanley’s note indicates that while AI accelerator vendors like Nvidia and Broadcom currently offer the most favorable risk-reward balance, the appeal of memory stocks has grown markedly after the latest correction. Sandisk and Micron, both previously leading the memory rally, have dropped 39% and 27% respectively from their recent peaks, though their shares are still up significantly year to date.
Notably, memory shortages are unlikely to subside in the near term, with concerns about further supply pressures extending into 2027 and 2028 remaining unresolved, as per the investment bank.
