2025-11-17 02:42Summary of Key Points from the Conference Call Industry Overview - The report focuses on the Global Technology Hardware industry, specifically the Hardware OEM/ODMs sector, which is facing increasing margin pressure due to a memory supercycle amidst weak hardware demand [1][8][9]. Core Insights and Arguments - Memory Pricing Surge: Memory prices (NAND and DRAM) have surged by 50-300% in the last six months, driven by demand from hyperscalers and underinvestment in NAND [9][11]. - Earnings Risk: The memory supercycle poses a downside risk to Hardware OEM earnings heading into 2026, with memory costs accounting for 10-70% of product costs [9][12]. - Historical Context: The last memory cycle (2016-2018) saw a median gross margin compression of 70bps year-over-year, indicating potential future earnings pressure for OEMs with high memory exposure [10][11]. - Current Demand Trends: The current demand for non-AI hardware is tepid, with enterprise hardware budget growth projected at only 1.6% year-over-year in 2026, which is below historical averages [12][15]. - Downgrades: Several companies, including DELL, HPQ, Asustek, and Pegatron, have been downgraded to Underweight due to expected margin pressures and negative EPS revisions [21][22]. Company-Specific Changes - Dell Technologies (DELL): Downgraded to Underweight with a new price target of $110, down from $144 [21]. - HP Inc. (HPQ): Downgraded to Underweight with a new price target of $24, down from $26 [21]. - Asustek: Downgraded to Underweight with a new price target of NT$500, down from NT$625 [21]. - Pegatron: Downgraded to Underweight with a new price target of NT$58, down from NT$73 [21]. - Hewlett Packard Enterprise (HPE): Downgraded to Equal-weight with a new price target of $25, down from $28 [21]. - Lenovo: Downgraded to Equal-weight with a new price target of HK$10.20, down from HK$13.00 [21]. - Giga-Byte: Downgraded to Equal-weight with a new price target of $290, down from $370 [21]. Additional Important Insights - Mitigation Strategies: OEMs are expected to respond to rising memory costs through pricing increases and cost management strategies, but even with these efforts, gross margins are projected to compress by 60bps year-over-year in 2026 [12][19]. - Risk Factors: Potential risks include being too early in the call regarding margin pressures, successful mitigation actions, and strong demand for AI infrastructure that could overshadow margin concerns [17][18]. - Investment Opportunities: Companies like Apple, Micron, and SK Hynix are highlighted as potential beneficiaries of the memory cycle due to their strong demand trends and margin resilience [18][58]. Conclusion - The hardware OEM/ODM sector is facing significant challenges due to rising memory costs and weak demand, leading to downgrades for several key players. The historical context of memory cycles suggests that margin pressures could persist, making it crucial for investors to monitor these developments closely.