Morgan Stanley: Storage stocks often look the cheapest at the cycle peak, but are actually very risky

The AI-driven supercycle for storage chips is still ongoing, but the investment logic for storage stocks is changing.

Morgan Stanley’s latest report points out that although tight supply and demand, rising prices, and improved profitability continue to provide strong support for the industry, the optimistic expectations for storage stocks have already been fully priced in as stock prices have risen sharply and earnings forecasts have been revised upward. The room for further gains is now facing a test.

The core issue is that the stronger the fundamentals of the storage industry, the easier it is for risks at the top of the cycle to be underestimated. Historically, storage stocks often peak before earnings reach their maximum, as the market tends to extrapolate the current high level of profits into the future, making stocks seem cheapest when industry sentiment is at its highest.

Against this backdrop, Morgan Stanley believes the high level of industry prosperity may not translate into sustained excess returns for storage stocks. As market expectations for profit growth continue to rise, the relative investment appeal of the AI computing power and networking supply chain is gradually surpassing that of the storage sector.

Supercycle continues, but cyclicality persists

The current prosperity of the storage industry has a solid demand foundation.

AI data center construction continues to drive up memory demand, with high bandwidth memory (HBM) accounting for nearly half of the AI server chip cost. Long-term supply agreements improve vendors’ revenue visibility by locking in purchase commitments and setting price floors. At the same time, HBM production crowds out traditional DRAM capacity, and the memory demand from new generations of AI models is continually increasing, further tightening the supply-demand dynamics.

Morgan Stanley data shows that the current HBM price per GB is nearly seven times the historical peak, reflecting the strength of this storage cycle. However, structural improvements in industry growth do not necessarily translate into improved investment returns for storage stocks. High profits will inevitably attract new capacity, and as supply catches up with demand or the downstream enters an inventory clearance phase, prices and profits may peak. The cycles in 2000, 2016, 2019, and 2022 all reflected this pattern.

The report believes that the turning point of this cycle may come later, but the industry still needs to pay attention to supply and demand changes after 2027.

Earnings expectations too high, low P/E ratios hide traps

Since the start of this cycle in September 2025, Asian storage stocks have jumped about ninefold, and total market capitalization has surpassed one trillion USD. Morgan Stanley data shows that consensus EPS forecasts for Asian storage companies have been raised by an average of 432%, reflecting extremely high expectations for profitability in this cycle.

However, continuous profit growth does not mean there is equal room for further stock price increases. Samsung and SK Hynix currently have forward P/E ratios of about 3 to 4 times, which appear cheap, but may simply be a valuation trap for cyclical stocks near peak earnings. Morgan Stanley points out that to support the further upside implied by current stock prices, DRAM contract prices would need to rise another 70% from today’s levels, which is highly unlikely to achieve.

Historical experience also warrants caution: in 2008 and 2012, storage stocks peaked about four months before earnings did; in 2018, this lead time widened to eight months. Storage stocks often reflect concerns about cyclical downturns ahead of time, precisely when earnings are strongest and valuations appear lowest.

HBM and DRAM boom continues, but supply risk is approaching

In the short term, the fundamentals of the storage industry remain supported. Morgan Stanley expects HBM prices to continue rising through 2027, with traditional DRAM and NAND contract prices likely to climb further into Q4 2026. Strong AI server demand, the shift of traditional DRAM capacity to HBM, and growing enterprise SSD (eSSD) demand together support the current upward trend in prices.

But changes on the supply side should not be ignored. Storage manufacturers are sharply increasing capital expenditures, and additional capacity is expected to gradually come online starting in the second half of 2027. Meanwhile, the consumer NAND market may face price pressure, and performance across different storage categories may diverge.

The evolution of data center architecture may also change profit distribution within the supply chain. Morgan Stanley estimates that storage components account for about 29% of content in a single Nvidia NVL72 rack, but drop to 19% when expanded to 8 interconnected racks, while networking equipment rises from 10% to 20%. As AI cluster scale increases, the weight of networking hardware in overall system value rises, meaning storage vendors may not benefit proportionally from growth in infrastructure investment.