IT hardware names have posted strong gains in recent months, but Morgan Stanley cautions that the group is vulnerable to negative earnings revisions as valuation peaks collide with mounting cyclical pressures.
Valuation snapshot - In a client note, analyst Erik Woodring said hardware stocks, excluding Apple, trade at 26 times next-twelve-months price-to-earnings. That multiple represents a 10-turn premium compared with the prior valuation peak, an all-time high on a relative basis versus the S&P 500, and a premium to blue-chip peers including Nvidia. The firm also highlighted that earnings revision breadth is close to 15-year peak levels.
Near-term forecasts and the second-half risk - Morgan Stanley acknowledged that its April and July quarter forecasts sit above consensus and reflect near-term spending resilience. At the same time the firm argued that the market may be overlooking broader cyclical dynamics. The note warned that pull-forward demand, memory inflation and supply shortages, and an unstable macroeconomic backdrop could combine to create downside margin and EPS risk in the second half of the year.
Three explicit risk factors
- Memory dynamics - Morgan Stanley flagged a once-in-a-generation memory supercycle, noting memory prices are up more than 600% year-on-year.
- Supply challenges - Widespread supply chain shortages remain a key concern for the hardware sector.
- Macro volatility - An increasingly volatile macroeconomic backdrop raises the prospect of downside pressure on margins and earnings.
Positioning and stock-level views - The firm kept a cautious stance on the group overall, while noting the risks are more likely to materialize in the second half than during the current earnings cycle. Among companies approaching results, Morgan Stanley identified Dell as having the most tactically positive setup, followed by HPE and Xerox. By contrast, HPQ and NetApp were singled out as carrying the greatest risk of margin and earnings-per-share guidance cuts this quarter, with both stocks assigned Underweight ratings.
Market moves cited in the note - The note referenced recent intraday moves for selected names: DELL +3.26%, NTAP -1.34%, XRX -1.17%, HPQ +0.48%, and HPE +3.62%.
Takeaway - While consensus and Morgan Stanley's own near-term estimates point to spending resilience in the immediate quarters, the firm warns that elevated valuations combined with memory-led price swings, supply constraints, and macro uncertainty could expose the hardware complex to downward earnings revisions later in the year.