Morgan Stanley semiconductor chief analyst Shawn Kim, who warned in July that memory stocks faced near-term correction risk and was at one point labeled a bear by the Korean market, has changed course in a new research report. He said the most violent phase of the memory market adjustment is nearing its end after sharp position reshuffling and price corrections in July, and argued that current valuations now offer an attractive tactical entry point.
Morgan Stanley calls the pullback a small wrinkle in the AI cycle
The bank described the recent decline in memory names as “a small wrinkle” in an AI supercycle, not a reversal in industry conditions. According to the report, the July correction in Korean equities and the memory supply chain was driven by the collapse of leveraged overseas AI hedge fund positions, retail margin deleveraging, and profit-taking after the year-over-year growth rate in memory prices peaked.
Kim said memory has become a critical computing bottleneck as demand rises for Agentic AI and video inference. He pointed to a peak year-over-year gain of as much as 700% in DRAM contract prices in this cycle as evidence that the long-term demand structure remains intact.
Valuations have dropped to low levels as earnings-cut pressure eases
After the earlier price reset, Morgan Stanley said the valuation picture now offers a wide margin of safety. The sector is trading at roughly 3x next-12-month price-to-earnings, or NTM P/E, with the market pricing in little if any long-term growth premium.
The bank also said the change in its analysts’ net earnings revision rate has retreated sharply from prior highs, a sign that the darkest phase of fundamental estimate cuts has likely passed. As the July position unwind fades, capital is moving back into DRAM and specialty memory names tied more directly to AI capital spending.
Morgan Stanley sees a cycle shift in the fourth quarter of 2026
The report forecasts that the memory industry will move into a later stage of the cycle in the fourth quarter of 2026. At that point, the main stock catalysts are expected to change. Morgan Stanley said the market focus will shift away from operating leverage created by earlier price spikes and toward shareholder returns such as buybacks, earnings stability supported by long-term agreements, and free cash flow performance.
Its latest channel checks indicate DRAM contract prices in the third quarter of 2026 will rise about 15% quarter over quarter, while NAND contract prices will rise about 20%. On the supply side, capacity is being redirected more quickly toward enterprise SSDs, or eSSDs, which the bank said should help absorb the impact of softer consumer demand.
SK Hynix and Samsung both seen with more than 60% upside
For Korea’s two major memory makers, Morgan Stanley made different financial revisions while keeping a bullish rating on both names.
SK Hynix received a 13% increase to Morgan Stanley’s 2026 earnings per share estimate, supported by its leadership in high-bandwidth memory, or HBM, and gains from asset disposals in the second quarter. Samsung Electronics, by contrast, had its 2026 EPS estimate cut by 10% because of weak demand in smartphones and consumer electronics.
Even with those different estimate changes, the report said both SK Hynix and Samsung Electronics have implied upside of more than 60% relative to their current share prices.