North American Memory Demand Exceeds Expectations, Morgan Stanley Raises Valuation

Overview

Morgan Stanley believes that due to sustained strong AI demand, the current imbalance in the memory market will not ease in the short term. It expects DRAM and NAND memory to remain tight for 2-3 years or even longer. Therefore, the institution has raised its earnings forecasts and target prices for memory-related companies - Micron and SanDisk.

Core views

The institution points out that DRAM is a major bottleneck in AI infrastructure development, while NAND is also in a highly tight state. Due to high demand and limited supply, memory product prices are expected to remain at high levels, driving continued improvement in corporate profitability. Particularly in the context of growing AI-driven demand for high-performance memory (such as HBM), the profit outlook for Micron and SanDisk is positive. For Micron, the institution believes that its DRAM business will be a core driver of AI development. Supply growth is constrained by cleanroom and EUV equipment capacity, so it expects its profitability to remain high. The institution raised its 2026/2027 fiscal year earnings per share (EPS) forecasts by 4% and 48%, respectively, and increased the target price to $1050. For SanDisk, the institution emphasizes that its premium NAND products continue to expand their market share in data centers and AI fields. Despite weak consumer markets, its penetration rate in data centers has improved, driving profit growth. The institution raised its 2026/2027 fiscal year EPS forecasts by 12% and 24%, respectively, and increased the target price to $1750.

Analysis framework

The institution uses a supply-demand framework to analyze the memory market. First, it determines that the surge in demand from AI development is the core driver of the current market. Second, by analyzing capacity constraints of DRAM and NAND (such as cleanrooms and EUV equipment), it confirms supply-side constraints, thus deriving a trend of sustained high prices and profits. Based on this, the institution uses pricing methods such as 'through-cycle earnings' (through-cycle EPS) and adjusts target prices and valuation multiples based on company profitability and market expectations, ultimately arriving at a buy rating.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-Demand Framework

  By analyzing market supply and demand relationships to determine price and profit trends, this report states that AI-driven demand far exceeds current supply capabilities, leading to long-term shortages of memory products.

• Company Fundamentals and Financial FrameworkFree cash flow analysis

  Free Cash Flow Analysis

  The institution analyzes the relationship between company free cash flow (FCF) and profitability. It believes that in the context of memory market shortages, companies will achieve higher free cash flows, supporting continued growth.

• Valuation MethodPE/PEG valuation

  PE/PEG Valuation

  The institution uses through-cycle earnings (through-cycle EPS) as the basis for valuation and adjusts target prices based on profit growth expectations, reflecting judgment on the sustainability of long-term profits.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Micron Technology Inc. (MU.O)

  As a leader in DRAM, benefits from strong demand for high-performance memory in AI

  Strengths

  Leads in technology and market share in AI and data center markets

  Weaknesses

  Faces restrictions from chip legislation, limited buybacks

  Comparison

  Compared to SanDisk, its AI-related revenue proportion is higher

  Risks

  Market volatility and macroeconomic impacts may lead to price adjustments

• SanDisk Corporation (SNDK.O)

  Benefits from growing demand for high-end NAND in data centers and expansion in AI inference

  Strengths

  Improved penetration in data center markets, technologically advanced

  Weaknesses

  Weak consumer markets affect overall profitability

  Comparison

  Compared to Micron, its AI-related revenue proportion is slightly lower

  Risks

  Intensifying market competition and capacity expansion may impact profit margins

Key data

• Micron 2026/2027 EPS Forecast$35Growth of 4% and 48%
• SanDisk 2026/2027 EPS Forecast$62.50Growth of 12% and 24%
• Micron Target Price$1,050Upgraded from $525
• SanDisk Target Price$1,750Upgraded from $1,100
• Micron Current PE29.5xHigher than historical levels, reflecting AI opportunities

Impact & implications

This report indicates that under the backdrop of ongoing expansion of AI applications, the profitability and valuation levels of the memory industry are expected to continue to rise. The institution believes that although the short-term market may be affected by macroeconomic uncertainties, the tight supply and demand situation in memory is unlikely to change in the short term, so related companies have strong potential for profit growth. Investors should pay attention to memory manufacturers' layouts and product structure optimization in the AI field, as well as their expansion in the data center market.

Risks

• AI demand falls short of expectations, leading to reduced memory demand
• Rapid memory capacity expansion brings forward supply-demand balance
• Changes in macroeconomic environment affect customer purchasing willingness

What to watch

• Continuity of AI demand and changes in data center orders
• Price movements of DRAM and NAND
• Capital expenditures and capacity utilization of both companies