Morgan Stanley Shifts from Bearish to Bullish: Memory Stock Correction Nears End – Tactical Buying Opportunity Emerges

Shawn Kim, the Morgan Stanley analyst once labeled the "bear's poster child" for shorting South Korean semiconductor stocks, has dramatically shifted his stance. In a recent report, he stated that the most intense phase of the ongoing price correction in the memory industry is nearing its end, and current valuation levels present an attractive "tactical entry opportunity."

Kim noted in the report that market focus on memory stocks is shifting from "when the pricing cycle will peak" to "how companies will return value to shareholders."

He believes that share buybacks, free cash flow performance, and the signing of long-term supply agreements (LTAs) will replace price fluctuations as the primary drivers of stock prices in the next phase.

Morgan Stanley maintained its target prices for Samsung Electronics (005930KS) and SK Hynix (000660KS), but made divergent adjustments to their earnings estimates.

SK Hynix's 2026 EPS forecast was upgraded by 13%, primarily due to a one-time gain from asset disposals in Q2. Samsung Electronics, however, saw its EPS estimate for the same period downgraded by 10% due to continued weakness in its consumer electronics division. Despite these opposing directions, both stocks imply over 60% upside potential compared to current prices.

Morgan Stanley: This Is Just a Minor Bump in a Super Cycle

Looking back at the start of this sell-off, Morgan Stanley was among the earliest institutions to issue warnings. As early as early July, the firm cautioned that the acceleration of DRAM price increases was about to peak, and with market positions overly concentrated in a few stocks, a correction could erupt at any moment.

Sure enough, in July, the Korean Kospi index and the two memory giants plunged. This sell-off not only confirmed Morgan Stanley’s prior warning but was further amplified by a chain reaction of leveraged AI hedge fund collapses overseas and margin calls forcing retail investors in South Korea to liquidate positions, causing the downturn to spiral out of control temporarily.

Yet Shawn Kim now frames this turmoil as "a minor ripple within the AI supercycle," not a signal of a trend reversal.

He emphasizes that after the cleansing effect of the correction, memory stocks now trade at a forward 12-month P/E ratio of around 3x, barely reflecting any long-term growth premium. The pace and extent of earnings estimate downgrades have also clearly slowed from the extreme levels seen at the end of June, suggesting the most pessimistic phase may already be behind us.

He also observes that following the large-scale unwinding in July, capital has begun flowing back into the market. Short-term investor preference is now focused on DRAM and niche memory products (such as DDR4, SLC NAND) that benefit most directly from AI capital expenditure, rather than memory module manufacturers.

This Time Is Different: AI Demand May Be Rewriting the Industry’s Nature

The core argument supporting Kim’s optimistic view is the "unprecedented scale" of AI-driven demand. The report highlights that during this AI infrastructure boom, DRAM prices surged up to 700% year-on-year—seven times higher than previous cyclical peaks—and the rally has lasted far longer than any prior cycle, making DRAM a critical bottleneck in AI infrastructure expansion.

Because of this, Kim argues that the market should no longer evaluate the memory industry through the traditional lens of "cyclical stocks."

If AI demand can truly extend the industry’s profit cycle, memory stocks deserve higher valuation multiples.

Kim also points to a perception gap in the market: investors have largely priced in the risk of "slowing earnings growth over the next 12 months," but remain deeply uncertain about "where earnings momentum will come from in 2028." It is precisely this pessimism and uncertainty about the long-term outlook, he says, that creates the greatest room for valuation recovery.

Industry Status: Price Gains Slow, Supply Structure Quietly Shifting

Beyond the overall outlook, Morgan Stanley’s latest industry survey reveals some subtle changes.

Q3 2026 DRAM contract prices rose approximately 15% quarter-on-quarter in early trading, slightly below the market’s initial expectation of 20%; NAND prices rose about 20%. With price increases expected to moderate further in Q4, the urgency for customers to pull forward orders and secure low-priced inventory has diminished.

On the supply side, the report expects more capacity to shift from consumer product lines to enterprise SSDs (eSSDs). Combined with continuously rising AI server demand, this could smoothly absorb new capacity without triggering oversupply concerns.

Morgan Stanley assesses that the entire memory industry will formally enter the latter half of the economic cycle in Q4 2026. At that point, the logic driving stock prices will fundamentally shift—from the past narrative of "price hikes driving operating leverage" to whether companies can demonstrate capital discipline, deliver stable profits via LTAs, and generate healthy free cash flow consistently.