Written by: Rita

Enterprise hardware spending strengthened across the board in the second quarter. Morgan Stanley's IT hardware report released on September 21, 2026, indicated that traditional server revenue grew by 87% year-on-year, storage grew by 34%, and PC grew by 14%, all hitting the highest growth rates in over ten years except for during the pandemic. However, the market has already seen through this strong period, with 6 of the 8 enterprise hardware stocks having valuation multiples lower after the earnings reports compared to before, despite an average 12% upward revision in earnings per share for the next fiscal year. Morgan Stanley believes that whether spending is strong is no longer the key issue; the key is how long this cycle can last.

Morgan Stanley's core judgment is that storage is still in the early stages of the upward cycle, the server cycle is further behind, and the PC has quickly deteriorated. The firm prefers P and SNX, followed by HPE, maintaining a neutral stance on Dell and a downgrade on HPQ. Dell is performing the strongest, but its valuation has already been reflected; HPQ faces dual pressures from PC demand and profit margins.

Enterprise hardware spending remains strong

In the second quarter, enterprise hardware spending saw broad growth. Traditional server revenue grew 87% year-on-year, storage grew 34%, accelerating from 23% in the first quarter, and PC revenue grew 14%. Morgan Stanley pointed out that these growth rates are at their highest levels in over a decade, excluding the pandemic. However, the market has already seen through the recent strong performance, with 6 of the 8 enterprise OEM, VAR, and distribution stocks having valuation multiples lower after the earnings reports, despite an average of 12% upward revision in earnings per share for the next fiscal year, with average price-to-earnings ratios compressing by about 1 time.

Morgan Stanley's AlphaWise survey shows that the current strength is mainly cyclical, driven by typical upgrades and large enterprise pre-purchases, while most AI workloads remain in the cloud. On-premises AI construction is expanding, but it is still a minority deployment, with the proportion of on-premises AI workloads expected to decrease by 3 percentage points in the coming year. Morgan Stanley believes that Dell and HPE have the opportunity to benefit from the continued on-premises AI, which is a contributing factor to the two companies' stock prices continuing to outperform after the earnings reports.

Storage is still in the early cycle

Storage growth is accelerating and is in the early stages of the upward cycle. Morgan Stanley pointed out that the server cycle is further back, and most of the opportunities for PCs have already passed. Storage has the longest runway among the three. In the second quarter external OEM storage data, P had the largest increase in EB shipment share and the second-largest revenue share growth, second only to Dell. P's pricing is more moderate than NTAP, and its product efficiency is higher, with companies increasingly inclined to hand over new storage projects to P.

Morgan Stanley reaffirmed its overweight rating on P, with a target price of $119. P currently has a price-to-earnings ratio of about 29 times, which is 14% lower than the average over the past three years. Enterprise OEM peers are currently trading more than 2 standard deviations above historical average valuations. Morgan Stanley believes that the market has underestimated P's potential for upward earnings revision, especially given the record growth and new orders from large-scale customers. The analyst day on September 23 is an important catalyst, with long-term operating margin guidance being a key indicator. An operating margin in the low 20% range would be disappointing, mid-20% would meet expectations, and mid-high 20% would be a positive surprise.

Server profit margins are unprecedentedly stacked

The profit margins of traditional servers have reached unprecedented levels. Both Dell and HPE are experiencing this trend. For example, in Dell's case, the proportion of low-margin AI servers in ISG revenue rose from 49% a year ago to 52%, but ISG gross margin expanded by 200 basis points year-on-year to 23.6%. Morgan Stanley estimates that even with year-on-year growth in gross margins for AI servers and storage, Dell's traditional server gross margin has surpassed 30% for the first time, about 9 percentage points higher year-on-year, while NAND and DRAM prices have increased by 340% to 550% year-on-year, which historically accounted for about 40% of the traditional server BOM.

Dell and HPE are actively repricing, with supply scarcity, enriched configurations, and inelastic demand pushing prices well above historical levels. Morgan Stanley estimates that if Dell's server unit, ASP, and revenue remain unchanged in F1Q27, but traditional server gross margins normalize to the low 20% range, F1H27 earnings per share would drop by 13%, about $1.52. Approximately $3.75 of FY27 earnings per share comes from the profit margin stack of traditional servers. Morgan Stanley believes that as long as memory prices continue to rise and supply remains constrained, the profit margin stack will not disappear quickly. The firm raised Dell's FY27 and FY28 traditional server gross margins by 50 to 80 basis points, increasing the target price from $499 to $511.

Dell performs the strongest but is highly valued

Dell's performance is extremely strong, and the market is willing to reward the best performers. Dell's revenue grew 58% year-on-year in the second quarter, with net profit increasing 189%, surpassing Lenovo, HPE, P, NTAP, and HPQ. Dell's stock price rose 34% in 2.5 weeks, while other hardware OEMs averaged a 9% increase. Dell's historical valuation premium is also higher than its peers. Morgan Stanley pointed out that Dell is an all-weather winner among the OEM group, a cloud AI winner, a winner in on-premises, a geopolitical winner, and a supply chain winner.

However, Morgan Stanley maintains a neutral rating on Dell, with a target price of $511. The reasoning is that the market has reflected strong execution, with a significant valuation premium, and there is uncertainty about the sustainability of profits in the latter part of the cycle. Early purchase of traditional servers and profit margin stacking will eventually normalize, at which point AI growth, market share increase, storage outperforming, and operational leverage will be needed to support profitability. Morgan Stanley believes that while Dell's recent performance is indisputable, at the current valuation levels, the positive asymmetry of risk and return is limited.

P and SNX are the preferred targets

Morgan Stanley's preferred enterprise hardware targets are P and SNX, followed by HPE. P is a leader in the all-flash array market, continuously gaining market share, benefiting from the rapid growth of all-flash storage compared to the overall enterprise storage market. P's hyperscale business provides long-term revenue and gross margin upside potential, which the market has not fully priced in yet. P's valuation is below historical averages, while enterprise OEM peers are above historical averages by more than two standard deviations.

SNX benefits from two lines: enterprise infrastructure distribution and hyperscale customer capital expenditure. Morgan Stanley expects SNX's distribution business to experience a compound annual growth rate (CAGR) of 11% in total billings to FY28, surpassing its peers; Hyve's contract manufacturing business is expected to have a CAGR of 64% in total billings, as new hyperscale projects ramp up, raising its share of operating profits to about 50%, driving an annual compound growth of more than 30% in earnings per share. SNX's current valuation is approximately 10 times FY27 earnings per share and 8 times FY28 earnings per share, and Morgan Stanley believes the market is underestimating the potential for market share increases, profit growth, and the value of Hyve options. The target price is $334.

HPQ faces dual pressure

HPQ faces dual pressures from PC demand and profit margins. In the second quarter, the operating profit margin for personal systems was 4.6%, approximately 4.3% after excluding tariff refunds, a decline of about 110 basis points year-on-year. Dell's CSG operating profit margin was about 330 basis points higher than HPQ, expanding about 120 basis points year-on-year to 7.6%. Morgan Stanley pointed out that the execution gap among PC OEMs is widening. HPQ's management believes that the fourth quarter will be the low point for personal systems profit margins, with recovery expected in FY27, but Morgan Stanley believes this recovery faces pressures from component inflation and weak units.

HPQ is valued at 11 times Street's FY27 earnings per share and 12.5 times MSE's earnings per share, making it increasingly difficult to justify, according to Morgan Stanley. HPQ is the only OEM in the coverage that has seen an expansion in price-to-earnings ratio before the earnings report, despite having the smallest earnings revision. Historically, HPQ has traded at about 7 times earnings per share during periods of revenue and profit declines year-on-year. Morgan Stanley maintains a downgrade rating with a target price of $19, representing over 40% downside from current levels. The firm expects HPQ's FY27 revenue to decline by 2% and earnings per share to decline by 16%, both below market consensus.

Important catalysts approaching

Several important catalysts are due in the coming weeks. On September 22, Dell COO meeting, Morgan Stanley will focus on supply chain allocation, traditional server pricing, AI server economics, and storage additions. On September 23, P analyst day to focus on hyperscale economics and long-term operating margin guidance. On September 24, SNX earnings report, to focus on distribution share increases and Hyve details. On September 30, HPE networking analyst day, to focus on whether the integration of Aruba and Juniper translates into sustained growth, and the scale of AMD Helios opportunities.

At the beginning of October, IDC's preliminary third-quarter PC data will provide firsthand readings of the severity of the PC deterioration. Monthly revenue from Taiwanese ODMs will be released before October 10, offering transparency on AI server, traditional server, and laptop shipments. Supply chain data points, especially on DRAM and NAND supply and pricing, are critical for assessing OEM pricing power and the sustainability of server profit margin stacking. Monthly VAR checks and CIO surveys will provide evidence of whether server intent has peaked and whether storage and networking are accelerating.

If the demand for storage and servers continues to exceed supply in 2027, will the valuation compression of enterprise hardware stocks reverse, or will the market continue to price in a peak cycle in advance?

Disclaimer

This article is a compilation and interpretation by Trend Research of third-party brokerage research reports (Morgan Stanley, September 21, 2026), along with public market information. The ratings, target prices, earnings forecasts, and related judgments quoted in this article are solely the opinions of the brokerage analysts and represent their respective institutions' positions, which do not reflect the views of Trend Research and do not constitute any investment advice.

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