Written by: Rita
Enterprise hardware spending strengthened across the board in the second quarter. Morgan Stanley pointed out in its IT hardware report released on September 21, 2026, that traditional server revenue grew 87% year-over-year, storage grew 34%, and PC grew 14%, all hitting the highest growth rates in more than a decade excluding the pandemic. But the market has already seen through this round of strength; 6 of 8 enterprise hardware stocks had lower valuation multiples after earnings than before, despite next fiscal year EPS being revised up by an average of 12%. Morgan Stanley believes whether spending is strong is no longer the key question; how long this cycle can last is the key.
Morgan Stanley's core judgment is that storage is still in the early stage of an upcycle, the server cycle is later, and PC has already deteriorated rapidly. The firm's top preferences are P and SNX, followed by HPE, neutral on Dell, and underweight on HPQ. Dell has the strongest execution, but valuation already reflects it; HPQ faces dual pressure from PC demand and profit margins.
Enterprise Hardware Spending Remains Strong
Enterprise hardware spending growth strengthened across the board in the second quarter. Traditional server revenue grew 87% year-over-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 all at the highest levels in more than a decade excluding the pandemic. But the market is already seeing through the near-term strength; 6 of 8 enterprise OEM, VAR, and distribution stocks had lower valuation multiples after earnings than before, despite next fiscal year consensus EPS being revised up by an average of 12%, with P/E multiples compressing by about 1 turn on average.
Morgan Stanley's AlphaWise survey shows that the current strength is mainly cyclical, driven by typical refresh cycles and large enterprise pull-forward purchases, with most AI workloads still in the cloud. On-prem AI buildout is expanding, but remains a minority deployment, with on-prem AI workload share declining 3 percentage points over the next year. Morgan Stanley believes Dell and HPE have the opportunity to benefit from continued on-prem AI, which is an incremental factor behind the two companies' sustained stock outperformance after earnings.
Storage Still in Early Cycle
Storage growth is accelerating and is in the early stage of an upcycle. Morgan Stanley pointed out that the server cycle is later, and most of the PC opportunity has already passed. Storage has the longest runway among the three. In second-quarter external OEM storage data, P had the largest increase in EB shipment share and the second-largest increase in revenue share, behind only Dell. P's pricing is more moderate than NTAP's, product efficiency is higher, and enterprises are increasingly inclined to give new storage projects to P.
Morgan Stanley reiterated its overweight rating on P with a price target of $119. P currently trades at about 29 times earnings, 14% below its three-year average. Enterprise OEM peers currently trade more than 2 standard deviations above their historical average valuation. Morgan Stanley believes the market underestimates P's earnings revision potential, especially record growth and new hyperscale customer orders. The September 23 analyst day is an important catalyst, with long-term operating margin guidance the key metric. Low-20% operating margin would be disappointing, mid-20% in line, and mid-to-high 20% a positive surprise.
Server Margin Stacking Unprecedented
Traditional server margin stacking has reached unprecedented levels. Both Dell and HPE are experiencing this trend. Take Dell as an example: low-margin AI servers rose from 49% of ISG revenue a year ago to 52%, but ISG gross margin expanded 200 basis points year-over-year to 23.6%. Morgan Stanley estimates that even with AI server and storage gross margins increasing year-over-year, Dell's traditional server gross margin exceeded 30% for the first time, about 9 percentage points higher year-over-year, while NAND and DRAM prices rose 340% to 550% year-over-year, and these two historically accounted for about 40% of traditional server BOM.
Dell and HPE are actively repricing, with supply scarcity, rich configurations, and inelastic demand together driving the price-cost spread far beyond historical levels. Morgan Stanley estimates that if Dell's F1Q27 server units, ASP, and revenue remain unchanged, but traditional server gross margin normalizes to low-20%, F1H27 EPS would be 13% lower, about $1.52. About $3.75 of FY27 EPS comes from traditional server margin stacking. Morgan Stanley believes that as long as memory prices continue to rise and supply remains constrained, margin stacking will not disappear soon. The firm raised Dell's FY27 and FY28 traditional server gross margin by 50 to 80 basis points, and raised its price target from $499 to $511.
Dell Has Strongest Execution but High Valuation
Dell's execution is extremely strong, and the market is willing to reward the best player. Dell's second-quarter revenue grew 58% year-over-year, net income grew 189%, surpassing Lenovo, HPE, P, NTAP, and HPQ. Dell's stock rose 34% in 2.5 weeks, while other hardware OEMs rose an average of 9%. Dell's premium relative to historical valuation is also higher than peers. Morgan Stanley pointed out that Dell is the all-weather winner in the OEM group: cloud AI winner, on-prem winner, geopolitical winner, and supply chain winner.
But Morgan Stanley maintains a neutral rating on Dell with a price target of $511. The reason is that the market has already reflected strong execution, the valuation premium is obvious, and there is uncertainty about earnings sustainability in the later stage of the cycle. Traditional server pull-forward purchases and margin stacking will eventually normalize, at which point AI growth, share gains, storage outperformance, and operating leverage will be needed to support earnings. Morgan Stanley believes Dell's recent execution is indisputable, but at current valuation levels, the positive asymmetry of risk-reward is limited.
P and SNX Are Top Picks
Morgan Stanley's most preferred enterprise hardware names are P and SNX, followed by HPE. P is the leader in the all-flash array market, continuously gaining share, benefiting from all-flash growing faster than the overall enterprise storage market. P's hyperscale business provides long-term revenue and gross margin upside that the market has not yet fully priced in. P's valuation is below its historical average, while enterprise OEM peers are more than two standard deviations above their historical average.
SNX benefits from both enterprise infrastructure distribution and hyperscale customer capex. Morgan Stanley expects SNX's distribution business billings to compound at 11% through FY28, outpacing peers; Hyve contract manufacturing billings to compound at 64% annually, and as new hyperscale projects ramp, its share of operating profit rises to about 50%, driving EPS compound annual growth of more than 30%. SNX currently trades at about 10 times FY27 EPS and 8 times FY28 EPS, and Morgan Stanley believes the market underestimates share gains, earnings growth, and the option value of Hyve. Price target $334.
HPQ Faces Dual Pressure
HPQ faces dual pressure from PC demand and profit margins. Second-quarter Personal Systems operating margin was 4.6%, about 4.3% excluding tariff refunds, down about 110 basis points year-over-year. Dell's CSG operating margin is about 330 basis points higher than HPQ's, expanding about 120 basis points year-over-year to 7.6%. Morgan Stanley pointed out that the execution gap among PC OEMs is widening. HPQ management believes the fourth quarter is the low point for Personal Systems margins and expects recovery in FY27, but Morgan Stanley believes this recovery faces pressure from component inflation and weak units.
HPQ trades at 11 times Street FY27 EPS and 12.5 times MSE EPS, which Morgan Stanley finds increasingly difficult to justify. HPQ is the only OEM in coverage whose P/E expanded before earnings, despite having the smallest earnings revision. Historically, HPQ has traded at about 7 times earnings during periods of declining revenue and profit. Morgan Stanley maintains an underweight rating with a price target of $19, implying more than 40% downside from current levels. The firm expects HPQ FY27 revenue to decline 2% and EPS to decline 16%, both below market consensus.
Catalysts Coming Densely
There are several important catalysts in the coming weeks. September 22 Dell COO meeting, where Morgan Stanley focuses on supply chain allocation, traditional server pricing, AI server economics, and storage attach. September 23 P analyst day, focusing on hyperscale economics and long-term operating margin guidance. September 24 SNX earnings, focusing on distribution share gains and Hyve details. September 30 HPE networking analyst day, focusing on whether Aruba and Juniper integration translates into sustained growth, and the scale of the AMD Helios opportunity.
Early October IDC preliminary third-quarter PC data, providing a first-hand read on the severity of PC deterioration. Taiwan ODM monthly revenue to be published before October 10, providing transparency on AI server, traditional server, and notebook shipments. Supply chain data points, especially DRAM and NAND supply and pricing, are key to judging OEM pricing power and the sustainability of server margin stacking. Monthly VAR checks and CIO surveys, providing evidence on whether server intentions have peaked and whether storage and networking are accelerating.
If storage and server demand continue to exceed supply in 2027, will the valuation compression of enterprise hardware stocks reverse, or will the market continue to price in a cycle peak ahead of time?
This article is a compilation and interpretation by Chaoxiang Research of a third-party brokerage research report (Morgan Stanley, September 21, 2026), combined with publicly available market information. The ratings, target prices, earnings forecasts, and related judgments cited in the article are all the views of the brokerage's analysts and represent only the position of their institution; they do not represent the views of Chaoxiang Research and do not constitute any investment advice.
Markets carry risk, and decisions must be made independently. This article should not be used as a basis for buying or selling any securities.
