The chip frenzy spreads to memory, Morgan Stanley: NAND is better than DRAM, with significant upside potential

The chip frenzy triggered by AI is rapidly spreading from logic chips such as GPUs to the memory sector. Morgan Stanley believes that the memory market, especially flash memory (NAND), is in the "early stages" of a sustained upward cycle.

On September 23, Wall Street Insight mentioned that due to strong demand for storage driven by AI data centers, Samsung significantly raised the prices of memory and flash products this week, with DRAM memory products increasing by as much as 30%, and delivery times extending from one month to over six months. Competitors like Micron and SanDisk are also following suit with price hikes.

According to Hard AI, Morgan Stanley released a research report on the same day indicating that the AI-driven chip investment frenzy is spreading from GPUs to the memory sector. The report emphasizes that the current market is at a critical turning point in the cycle, and a recovery cycle in memory prices is expected after a double bottom by 2026.

Morgan Stanley believes that compared to the DRAM memory and mechanical hard drives that the market generally focuses on, the flash memory market shows more significant upward potential due to its drastic shift in supply and demand dynamics.

Therefore, the report emphasizes that investors should focus on pure flash manufacturers such as KIOXIA and SanDisk, as well as comprehensive manufacturers like Samsung and SK Hynix, along with related module manufacturers.

AI Narrative Spreads, Memory Takes Center Stage

According to Morgan Stanley's analysis, the semiconductor industry, especially the memory sector, is at a critical turning point in the cycle.

Historically, the Philadelphia Semiconductor Index (SOX Index) has shown a cycle of moving from "euphoria" to "pessimism" and back again, and the current market is in the "optimistic phase."

The charts in the report show that the memory cycle has decoupled from the logic chip cycle in the AI era, but is now showing signs of catching up.

The key factor supporting this judgment is the normalization of inventory levels. Data shows that after a long period of destocking, the memory industry's inventory is recovering to healthy levels, laying the foundation for the next round of price increases and demand recovery.

Additionally, the correlation between the ISM PMI index, which represents manufacturing sentiment, and non-AI semiconductor revenue growth also indicates a recovery.

Morgan Stanley believes that as the macroeconomic environment stabilizes and demand gradually warms up, the fundamentals of the memory market are improving, and the industry is about to enter a new upward cycle.

Price or Current "Double Bottom," Long-term Uptrend Expected

Although recovery is in sight, short-term price fluctuations may occur.

Morgan Stanley cited TrendForce data predicting that memory pricing may face a "double bottom" scenario, meaning after a recent rebound, it may decline again before entering a sustained upward channel.

Specifically, the contract prices for DRAM memory and flash memory in the second quarter of 2025 have been revised upward, indicating a preliminary recovery of market confidence.

For example, the blended average selling price of computer DRAM memory is expected to rise by 3-8% in the second quarter. However, prices for certain categories are expected to stabilize or slightly decline in the fourth quarter, before potentially experiencing stronger increases in 2026.

The report noted that while the price trend in the second half of 2025 is complex, the market's expectation for commodity memory to enter an upward cycle in 2026 is clear. Among them, the recovery momentum in the flash memory market is particularly noteworthy, which is one of the reasons the firm prefers flash memory over DRAM.

NAAD Short-term Demand Surge

The report emphasizes that cloud service providers (CSPs), due to AI inference business and limited supply of mechanical hard drives, are placing orders for enterprise solid-state drives (eSSD) at an unprecedented scale and speed, creating a huge expected supply gap.

This year, cloud service providers (CSPs) have deviated from the norm, not waiting for the traditional October or November, but starting negotiations for 2026 storage needs months in advance.

This order frenzy has directly led to a surge in stock prices of flash memory-related companies. As of September 23, SanDisk's stock price has skyrocketed by 95%, and KIOXIA has risen by 75%, far exceeding the 10% increase of the SOX index during the same period.

The core driving force behind this wave is the unexpectedly high orders for near-line enterprise solid-state drives (NL eSSD).

Morgan Stanley pointed out that the NL eSSD order volume from just four major clients has reached approximately 200EB, not including about 150EB of AI-related demand.

Despite market concerns about "duplicate orders," Morgan Stanley believes that even in its most optimistic model, assuming that NL eSSD shipments in 2026 are only 90EB, the market will still face a 7% supply gap. Any demand exceeding this number will further enhance suppliers' pricing power.

(Under optimistic forecasts, NL eSSD shipments are expected to be around 90EB, indicating a 7% supply gap in 2026) The explosive demand directly translates into a strong rise in prices.

Currently, some suppliers have even suspended quotes for 2026, waiting for clarity on production allocation. The report expects that after a nearly double-digit increase in the fourth quarter of 2025, the overall price of flash memory will rise another 15-20% in the first half of 2026.

(Estimated contract pricing for flash memory)

Even considering that Yangtze Memory Technologies Co., Ltd. may increase its global supply share from 12% to 15% in 2026, this 3% increment is expected to mainly flow into the domestic market, which is insufficient to cause a substantial impact on the global supply-demand pattern.

Supply Restraint in Flash Memory

In stark contrast to the explosive demand, the response from the supply side appears very restrained and lagging.

Although analysts have raised the capital expenditure forecast for flash memory wafer fab equipment in 2026 to $13.8 billion (close to the $15 billion bullish scenario), the recovery speed of capital expenditure for flash memory will still lag behind that of DRAM memory. The main reasons for this phenomenon are twofold:

• First, after experiencing long-term losses, manufacturers generally maintain strict capital discipline and are reluctant to easily initiate large-scale capacity expansions.
• Second, within limited capital budgets, the higher-margin DRAM memory (especially mechanical hard drives) business is the priority for major manufacturers in terms of investment and capacity allocation.

This "capital discipline" means that even in the face of explosive demand, the effective capacity of flash memory is unlikely to quickly catch up in the short term, thereby prolonging and exacerbating the current supply tightness. This provides solid fundamental support for the continued rise in flash memory prices.

Focus on Core Targets and Valuation Potential

The report points out that in this flash memory supercycle ignited by AI, choosing the right investment targets is crucial. We are still in the early stages of the cycle, with pricing negotiations, new customer development, and the recovery of traditional demand bringing more upside potential.

Regarding specific manufacturers:

Kioxia: As a pure flash memory manufacturer, its business is highly tied to the flash memory cycle. Although the company has high financial leverage, this means significant profit elasticity during the upcycle. Its advanced BiCS-8 technology positions it favorably in the eSSD market, with strong growth expected. A price-to-earnings ratio of 7.2 times based on the expected earnings per share for fiscal year 2027 is considered a reasonable valuation benchmark.

SanDisk: Although its market share in the eSSD market (about 13% of its bit shipments) is below the industry average (about one-third), it will be a huge beneficiary of the overall price increase in flash memory this round. With the launch of the new generation BICs8 products, its market share in the eSSD market is expected to increase. The report highlights its clear profit growth path, with the potential to achieve earnings per share exceeding $10. With a price-to-book ratio (NTM P/B) of 2 times, commonly seen in historical upcycles, its price target could reach about $140

Samsung and SK Hynix: As giants in the storage market, they will benefit from the strengthening of the entire storage product cycle, especially in the flash memory business.

Module manufacturers: Such as Jiangbolong (Longsys) and Qunlian (Phison), will also benefit from the rising prices of flash memory products.

(Composition of flash memory chip production in 2026)