Morgan Stanley Report: Traditional Server Revenue Up 87%, Storage in Early Cycle

Written by: Rita

Enterprise hardware spending strengthened across the board in the second quarter. According to Morgan Stanley’s IT Hardware report issued on September 21, 2026, traditional server revenue rose 87% year-over-year, storage increased by 34%, and PCs grew by 14%—all posting their highest growth rates in over a decade, excluding the pandemic period. However, the market has already priced in this strength: six out of eight enterprise hardware stocks now trade at valuation multiples below pre-earnings levels, despite an average 12% upward revision to next fiscal year’s EPS. Morgan Stanley believes the key question is no longer whether spending is strong, but how long this cycle can last.

Morgan Stanley's core view is that storage is still in the early stages of an upcycle, server cycles are further behind, and PCs have rapidly deteriorated. The firm is most bullish on P and SNX, followed by HPE, maintains a neutral stance on Dell, and assigns a sell rating to HPQ. Dell has the strongest execution, but its valuation is already priced in; HPQ faces dual pressures from weak PC demand and margin compression.

Enterprise hardware spending strengthened broadly in the second quarter. Traditional server revenue grew 87% year-over-year, storage increased 34%—accelerating from 23% in the first quarter—and PC revenue rose 14%. Morgan Stanley noted that these growth rates are among the highest in over a decade, excluding the pandemic period. However, the market has already priced in this recent strength: six out of eight enterprise OEM, VAR, and distributor stocks traded at lower valuation multiples after earnings reports compared to before, despite an average 12% upward revision to consensus EPS for the next fiscal year and an average P/E compression of about 1x.

Morgan Stanley’s AlphaWise survey shows that current strength is primarily cyclical, driven by typical refresh cycles and enterprise pre-purchasing, with most AI workloads still residing in the cloud. On-prem AI deployment is expanding, but remains a minority of total deployments, with the share of on-prem AI workloads expected to decline by 3 percentage points over the next year. Morgan Stanley believes Dell and HPE stand to benefit from ongoing on-prem AI adoption, a key incremental factor behind their sustained post-earnings stock outperformance.

Storage growth is accelerating and still in the early stages of an upward cycle. Morgan Stanley notes that the server cycle is further along, and most PC opportunities have already passed. Storage represents the longest runway among the three. In Q2 external OEM storage data, P achieved the largest growth in shipment share and second-largest growth in revenue share, trailing only Dell. P’s pricing is more moderate than NTAP’s, its products are more efficient, and enterprises are increasingly entrusting new storage projects to P.

Morgan Stanley reaffirms an Overweight rating on P with a price target of $119. P’s current P/E ratio is approximately 29x, 14% below its three-year average. Peer OEM companies are currently trading more than two standard deviations above their historical averages. Morgan Stanley believes the market is undervaluing P’s earnings upgrade potential, particularly driven by record growth and new hyperscale customer orders. The Analyst Day on September 23 is a key catalyst, with long-term operating margin guidance being the critical metric. An operating margin of low 20% would be disappointing, mid-20% would meet expectations, and high 20% would be a positive surprise.

Profit margins for traditional servers have reached unprecedented levels. Both Dell and HPE are experiencing this trend. For example, Dell’s low-margin AI servers accounted for 52% of ISG revenue, up from 49% a year ago, yet ISG’s gross margin expanded by 200 basis points year-over-year to 23.6%. Morgan Stanley estimates that, even as AI server and storage gross margins increased year-over-year, Dell’s traditional server gross margin surpassed 30% for the first time—up approximately 9 percentage points year-over-year—while NAND and DRAM prices rose 340% to 550% year-over-year; these components historically accounted for about 40% of the BOM for traditional servers.

Dell and HPE are actively repricing their products, with scarce supply, rich configurations, and inelastic demand driving the price-cost spread well above historical levels. Morgan Stanley estimates that if Dell’s F1Q27 server unit sales, ASP, and revenue remain unchanged but traditional server gross margins normalize to the low 20s, F1H27 EPS would decline by 13%, to approximately $1.52. Approximately $3.75 of FY27 EPS comes from the margin stacking of traditional servers. Morgan Stanley believes that as long as memory prices continue to rise and supply remains constrained, this margin stacking will not dissipate quickly. The firm has raised its estimates for Dell’s FY27 and FY28 traditional server gross margins by 50 to 80 basis points and increased its price target from $499 to $511.

Dell executed exceptionally strongly, and the market is rewarding the top performer. Dell’s second-quarter revenue increased 58% year-over-year, and net profit rose 189%, outperforming Lenovo, HPE, P, NTAP, and HPQ. Dell’s stock rose 34% within 2.5 weeks, compared to an average increase of 9% for other hardware OEMs. Dell also trades at a higher premium relative to its historical valuation than its peers. Morgan Stanley noted that Dell is a perennial winner among OEMs—a winner in cloud AI, on-premises, geopolitics, and supply chains.

However, Morgan Stanley maintains a Neutral rating on Dell with a price target of $511. The rationale is that the market has already priced in strong execution, resulting in a clear valuation premium, while the sustainability of profits in the later stage of the cycle remains uncertain. Pre-purchasing of traditional servers and margin stacking will eventually normalize, at which point profitability will depend on AI growth, market share gains, outperformance in storage, and operating leverage. Morgan Stanley believes Dell’s recent execution is unquestionable, but at current valuation levels, the upside-to-risk asymmetry is limited.

Morgan Stanley's top preferred enterprise hardware names are P and SNX, followed by HPE. P is the market leader in the all-flash array segment, consistently gaining market share and benefiting from the faster growth of all-flash storage compared to the overall enterprise storage market. P’s hyperscale business offers long-term upside potential for revenue and gross margins, which is currently underappreciated by the market. P’s valuation trades below its historical average, while its enterprise OEM peers trade more than two standard deviations above their historical averages.

SNX benefits from two growth drivers: enterprise infrastructure distribution and hyperscale customer capital expenditures. Morgan Stanley expects SNX’s distribution business total billings to grow at an 11% CAGR through FY28, outpacing peers; its Hyve contract manufacturing business total billings are projected to grow at a 64% CAGR, with new hyperscale projects scaling up and contributing approximately 50% of operating profit, driving EPS growth of over 30% CAGR. SNX is currently valued at approximately 10x FY27 EPS and 8x FY28 EPS; Morgan Stanley believes the market is undervaluing SNX’s market share gains, profit growth, and the option value of Hyve. Target price: $334.

HPQ is facing dual pressures on PC demand and profit margins. The operating margin for its personal systems segment in Q2 was 4.6%, or approximately 4.3% after excluding tariff refunds, a decline of about 110 basis points year-over-year. Dell’s CSG operating margin is approximately 330 basis points higher than HPQ’s and expanded by about 120 basis points year-over-year to 7.6%. Morgan Stanley noted that the execution gap among PC OEMs is widening. HPQ management believes Q4 will be the low point for personal systems margins, with an expected recovery in FY27; however, Morgan Stanley believes this recovery faces pressure from component inflation and weak unit volumes.

HPQ is valued at 11 times Street FY27 EPS and 12.5 times MSE EPS, which Morgan Stanley believes is increasingly difficult to justify. HPQ is the only OEM in the coverage universe to have seen multiple expansion ahead of earnings, despite posting the smallest upward earnings revision. Historically, HPQ traded at approximately 7 times P/E during periods of year-over-year revenue and profit declines. Morgan Stanley maintains an Underweight rating and a $19 price target, implying over 40% downside from current levels. The firm expects HPQ’s FY27 revenue to decline 2% and EPS to decline 16%, both below market consensus.

Several key catalysts are coming up in the coming weeks. On September 22, the Dell COO meeting will focus on supply chain allocation, traditional server pricing, AI server economics, and storage add-ons. On September 23, the P Analyst Day will highlight hyperscale economics and long-term operating margin guidance. On September 24, the SNX earnings report will emphasize increased distribution share and details on Hyve. On September 30, the HPE Network Analyst Day will examine whether the Aruba and Juniper integrations are translating into sustained growth, as well as the scale of the AMD Helios opportunity.

In early October, IDC’s preliminary Q3 PC data provides the first read on the severity of PC deterioration. Taiwanese ODM monthly revenues, announced before October 10, offer visibility into AI server, traditional server, and notebook shipments. Supply chain data points—particularly DRAM and NAND supply and pricing—are critical for assessing OEM pricing power and the sustainability of server margin stacking. Monthly VAR checks and CIO surveys provide evidence on whether server demand has peaked and whether storage and networking are accelerating.

If storage and server demand continue to outstrip supply through 2027, will the valuation compression in enterprise hardware stocks reverse, or will the market continue to price in a cycle peak in advance?

Disclaimer

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, price targets, earnings forecasts, and related judgments cited herein reflect the views of the brokerage's analysts and represent only the position of their respective institution; they do not reflect the views of Chaoxiang Research nor constitute any investment advice.

The market carries risks; make decisions independently. This article should not be used as a basis for buying or selling any securities.