Morgan Stanley names the unexpected tech sector leaders of 2025. Is it too late to buy?

Morgan Stanley analysts note that this year's growth leaders in the technology sector are not AI chip makers, but memory and storage companies such as Western Digital and Seagate. Their shares have jumped nearly 190% and more than 170% respectively over the year, thanks to a new market: large cloud companies are buying more disks to store data created by AI models.

This year's top technology stocks include not chipmakers but securities from memory and storage manufacturers, which are becoming increasingly important in the AI boom, MarketWatch writes . As storage demands increase, so does demand for products from companies such as Western Digital and Seagate Technology, Morgan Stanley notes. They are the second- and third-best stocks in the S&P 500 index this year, up 189% and 173%, respectively. Both companies make hard disk drives (HDDs) and solid-state drives (SSDs), which are needed to store the large amounts of data processed by AI models.

For a long time, Morgan Stanley analysts remind us, Western Digital and Seagate Technology were considered typical representatives of cyclical industries - something like a commodity whose demand rises and falls with the economy. With the development of AI, those companies have found a new growth path, and this year their stocks are on track for their best performance since 2009, MarketWatch points out.

"Data is the oil that will keep AI running, and it is increasingly clear that the hard disk drive market is controlled by just a few large companies that benefit from the massive amounts of storage needed for AI," Morgan Stanley said in a note.

At the premarket on October 27, Western Digital shares rose by 3%, Seagate jumped by 3.5%.

Analysts recognize that interest in Western Digital and Seagate shares may raise questions about long-term sustainability - both because of the cyclical nature of these securities and investor concerns about how long the momentum in the AI market will continue if businesses are slow to adopt these technologies. Despite these risks, Morgan Stanley remains optimistic about the securities, expecting improved profitability and positive growth trends.

Both companies have limited capacity to avoid the price fluctuations that characterize the memory market, explains Mizuho analyst Jordan Klein. If capacity increases too much, oversupply occurs when demand drops sharply due to macroeconomic factors or industry cyclicality, and this leads to lower prices. "The markets are already quite mature, and the key factor has always been large cloud companies that buy hardware unpredictably or in large batches: they buy a lot at first, deploy it, and don't place new orders for a while after that until more capacity is needed again," Klein emphasized. He believes Seagate and Western Digital will let prices rise. They are now selling forward capacity with long-term supply agreements that provide a clear understanding of future revenues. "They're looking for predictability, the ability to raise prices and I think they're happy that it's increasing their margins and cash flow," the analyst said.

All the data that is processed to create images and videos using AI has to be stored somewhere, explained Ray Wang, lead semiconductor analyst at Futurum Group. He expects demand for HDD and SSD drives to continue to grow, given the emergence of more sophisticated AI models with video and audio capabilities that will require more memory and space.

Despite this year's rally, Seagate shares are recommended to buy by 18 analysts out of 26, MarketWatch shows. Another six advise holding positions, assuming that quotes will show stable behavior without significant movement. Two analysts advise to sell these securities. The average target price, however, suggests a small upside potential of about 5%.

Western Digital has 23 out of 30 buy recommendations . Five analysts have a neutral stance on the company's shares, while two suggest selling them. At that, the consensus target practically corresponds to the current quotations of the manufacturer.

This article was AI-translated and verified by a human editor