Samsung's Financial Performance Shines but 'Cycle Ends' Morgan Stanley Cuts Value by Another 40%

Samsung Electronics' second-quarter financial performance was outstanding, with operating profit increasing by approximately 19 times to 89.4 trillion Korean won, setting a new historical high. This performance reflects the extreme benefits of AI structural storage inflation. However, the market reacted coldly, and Morgan Stanley predicted that the memory super-cycle is nearing its peak, downgrading the target price to 245,000 Korean won and warning of a potential 40% drop.

Morgan Stanley noted that Samsung's second-quarter revenue of 171 trillion Korean won and operating profit of 89.4 trillion Korean won reflect a structural change driven by AI data center demand. In this cycle, the price elasticity of DRAM and NAND is significant, with cumulative increases of over 230% and 190% respectively predicted from the fourth quarter of 2025 to the second quarter of 2026.

Samsung successfully raised the overall average selling price and gross margin by shutting down low-end general DRAM production lines and focusing advanced processes on HBM and server DDR5. Additionally, the reduction in capital expenditure from previous cycles led to a decrease in unit depreciation costs, achieving a double benefit of 'price increase and cost reduction'.

However, Morgan Stanley pointed out that these figures are merely 'scenery in the rearview mirror'. The market's focus should be on the specific guidance regarding DRAM and NAND price trends, HBM customer long-term contract progress, and future capital expenditure constraints in the complete financial report on July 30.

Regarding the potential crisis of the cycle nearing its peak, Morgan Stanley predicted that there is a risk of oversupply in 2027. Furthermore, with the continued sluggishness of the end-consumer market, the pressure for price declines in consumer-level storage could expand, negatively impacting manufacturers' overall average prices.

Geopolitical risks are also an unignorable factor. The U.S. is tightening export controls on advanced storage equipment, limiting Samsung's HBM shipments to China. In contrast, Micron and SK Hynix have more diversified customer structures, making them relatively more resilient.

Morgan Stanley pointed out a valuation misconception. Although Samsung's current stock price corresponds to a price-to-earnings ratio (PE) of only 4 to 5 times for 2026, appearing highly valuable for investment, this is a peak profit trap for cyclical stocks. Considering the downward adjustment of profit expectations for 2027, dynamic valuation will quickly rise, significantly reducing the long-term allocation appeal.

Investor reactions best illustrate this psychological game. Samsung's stock price plummeted by over 6% in a single day after the financial report was released, showing that the foreign ownership ratio has dropped to a new low since 2017. Institutional investors tend to 'take profits' after the financial report's good news has been realized.

Facing this situation, Morgan Stanley has adopted a clear capital transfer strategy. It suggests that investors reduce the weight of memory chips in their global technology portfolio and switch funds to AI cloud computing companies such as NVIDIA (NVDA-US), Microsoft (MSFT-US), and Google (GOOGL-US).

These AI downstream computing giants not only continue to benefit from the landing of AI capital expenditure but are also less likely to be directly impacted by the cyclical price volatility of memory compared to storage manufacturers.

In summary, although Samsung Electronics delivered a record financial report, this scorecard is more like the glorious finale of this 'AI storage super-cycle'.