Key Takeaways:
Morgan Stanley's Shawn Kim turned bullish on memory stocks, saying the sector's sharpest correction is near its end and valuations offer an attractive tactical entry.
"The pullback is a small ripple in the AI supercycle," Kim, who covers Korean technology at Morgan Stanley and was previously viewed as a bearish voice in the Korean market, said in a report dated early August.
Morgan Stanley maintained target prices on Samsung Electronics and SK Hynix, both implying more than 60 percent upside from current levels. The firm raised its 2026 EPS estimate for SK Hynix by 13 percent, reflecting second-quarter asset disposal gains, while cutting Samsung's 2026 EPS estimate by 10 percent on weak consumer electronics. Memory stocks trade at about three times next-twelve-month earnings, with little long-term growth premium priced in.
The report frames the recent selloff as a temporary blip in the AI supercycle, with both companies expected to grow earnings 25 to 50 percent in 2027. Kim said the market focus is shifting from price cycles to capital returns, with buybacks, free cash flow, and long-term supply agreements set to drive the next leg of stock gains.
Morgan Stanley's industry checks show third-quarter DRAM contract prices rising about 15 percent quarter over quarter in early trading, below the prior estimate of 20 percent, while NAND prices climbed about 20 percent. The urgency for customers to lock in low-cost inventory has eased as fourth-quarter incremental pricing trends slow.
During this AI buildout cycle, DRAM prices at one point rose 700 percent year over year, roughly seven times the historical price peak, and the cycle has lasted unusually long. DRAM has become a key bottleneck in AI infrastructure construction, Kim wrote.
On the supply side, more capacity is expected to shift from consumer products to enterprise SSDs, matching continued growth in AI server demand and helping absorb new supply. Morgan Stanley expects the memory industry to transition to the late-cycle phase in the fourth quarter of 2026, when the driver of stock gains shifts from price-driven operating leverage to capital returns, long-term supply agreement earnings stability, and sustainable free cash flow.
The market has already priced in slowing EPS growth over the next 12 months, but investors lack confidence in what will drive EPS higher in 2028, Kim noted. That divergence is the core logic behind the valuation recovery room he sees.
The reversal from a prominent bearish voice could attract institutional buying into Korean memory stocks and lift KOSPI sentiment, with the 60 percent-plus implied upside on both names offering a fresh entry point. Investors will watch fourth-quarter contract pricing and capital return announcements as the industry moves into late-cycle.
This article is for informational purposes only and does not constitute investment advice.
