DRAM Surge: A Tactical Headwind for Firewall Builders

The immediate trigger is a brutal supply shock in a critical component. As of the third quarter of 2025, DRAM contract prices have increased by a whopping 171.8% year over year. This isn't a one-off spike; the trend is accelerating. For the fourth quarter of 2025, traditional DRAM is projected to see a quarter-on-quarter increase of 8 percent to 13 percent. The driver is a simple imbalance: insatiable demand from the AI industry is outstripping supply. Powerful AI chips made by the likes of Nvidia, AMD and Google need so much RAM, and these chipmakers are the first in line for components. This has forced memory manufacturers to shift production away from consumer-grade DRAM, creating a severe shortage for other hardware builders.

The impact is now rippling down the supply chain. This shortage is expected to persist into 2026, with industry outlooks suggesting 2026 likely to see severe DRAM shortages. The pressure is already visible in retail prices, where regular DDR5 memory prices are roughly double what they were just a few months ago. For companies building complex network hardware, this is a direct cost headwind. Wedbush has identified the specific firms facing the greatest pressure: Fortinet (FTNT), Check Point Software Technologies (CHKP) and Palo Alto Networks (PANW). Their firewall buildouts are now directly impacted by this surge in a fundamental component.

Financial Impact: Margin Pressure and Market Reaction

The DRAM shock is no longer a distant supply-chain worry; it's a direct threat to the bottom line. For firewall builders, DRAM is a fundamental input cost. When the price of this key component surges by over 170% year-over-year, it directly squeezes gross margins on their appliances. This is the core financial risk: higher component costs that may be difficult to pass on quickly to customers, especially in competitive segments.

The pressure could also disrupt revenue timing. A severe shortage may force delays in new firewall buildouts or planned system upgrades. This creates near-term visibility issues, as sales cycles lengthen and order fulfillment becomes a function of component availability rather than customer demand alone. The market is already pricing in this uncertainty.

The clearest signal is Fortinet's stock performance. Over the past 120 days, the stock has fallen nearly 25%. While broader market and sector factors play a role, this sharp decline aligns with the timeline of the DRAM crisis intensifying. It shows investors are factoring in the tangible risks to both margins and growth execution. The setup now is one of tactical pressure: the event-driven catalyst of soaring component costs is translating into concrete financial headwinds and a negative market reaction.

Valuation Tension: Headwinds vs. Potential Undervaluation

The market is now caught between two powerful forces. On one side, the near-term financial pressure from soaring DRAM costs is undeniable. On the other, the stock's valuation metrics suggest the market may be over-penalizing the company for a cyclical shock. This creates a classic tension for event-driven investors.

Fortinet's stock price reflects the headwinds. Over the past 120 days, the shares have fallen nearly 25%, trading near the lower end of their recent range. Yet, this sell-off has pushed key valuation multiples to extreme levels. The stock's P/E ratio is near a 10-year low, and its P/S ratio is near a 1-year low. In other words, the market is pricing in severe and prolonged trouble. The question is whether this discount is justified by the fundamental threat or if it's an overreaction to a temporary cost spike.

The key uncertainty is the durability of the DRAM price surge. The evidence shows the trend is accelerating, with prices projected to rise another 8% to 13% quarter-on-quarter for traditional DRAM in Q4 2025. This upward trajectory is likely to persist even into the beginning of the new year. The driver is a structural shift: memory manufacturers are prioritizing high-margin AI and server applications, creating a severe shortage for consumer-grade DRAM. For a company like Fortinet, which builds complex network appliances, this is a direct input cost shock.

The tactical setup hinges on whether this is a temporary spike or a new permanent floor. If the DRAM shortage is cyclical and supply eventually catches up, the margin pressure could ease, leaving the stock's depressed valuation as a potential mispricing. The market may be applying a permanent discount to the earnings power of firewall builders, overlooking that the component cost shock could be a phase, not a permanent condition. The valuation tension is clear: the stock is priced for a worst-case, long-term scenario, while the catalyst is a near-term, supply-driven event.

Catalysts and Risks: What to Watch for a Reversal

The path to a resolution for firewall builders hinges on a few clear, near-term signals. The first and most immediate is the Q4 2025 earnings season. Investors must listen for explicit commentary from Fortinet and Check Point on the component cost pressures. Management guidance will be critical: will they raise prices to protect margins, or absorb the hit? Any shift in tone-from acknowledging the headwind to signaling a path to pass-through costs-will be a major catalyst for the stock.

The second key metric is the trajectory of DRAM prices themselves. The evidence shows the upward trend is likely to persist into the new year, with traditional DRAM projected to rise another 8% to 13% quarter-on-quarter for Q4 2025. A plateau or, better yet, a decline in prices during Q1 2026 would signal easing pressure and could provide immediate relief to margins. The market will be watching for any sign that the supply-demand imbalance is starting to correct.

The biggest risk, however, is that this shortage leads to permanent price increases. If memory manufacturers continue to prioritize high-margin AI and server applications, as they are now, the cost floor for consumer-grade DRAM could remain elevated. This would force firewall vendors to raise appliance prices to maintain profitability. In a competitive market, that could trigger a loss of market share, turning a temporary cost shock into a lasting competitive disadvantage. The current setup is a race between easing supply and entrenched pricing power. For now, the event-driven catalyst is clear, but the reversal will depend on these specific, watchable events.