Morgan Stanley projects a robust start to the European semiconductor fourth-quarter earnings season, focusing on capital spending visibility and strong order momentum. Favoring wafer fabrication equipment companies ASML and ASMI, the bank anticipates continued investment in memory and foundry sectors fueling growth. Their analysis suggests sustained DRAM-related demand through 2027 and increased confidence surrounding foundry spending, particularly following TSMC guidance. The firm has also adjusted price targets for associated semiconductor firms based on prevailing structural trends within the industry.
Key Points
- Morgan Stanley favors wafer fabrication equipment stocks ASML and ASMI for Q4 earnings driven by strong memory and foundry investments.
- Expected DRAM-driven demand momentum is projected to persist through 2027, supporting semiconductor equipment order books.
- Price targets raised for ASML (€1,400), ASMI (€825), STMicroelectronics (€22), and Infineon (€45), indicating positive sector outlook; Arm’s target lowered highlighting stock price correction.
- Foundry spending outlook improved following TSMC guidance, bolstering confidence in WFE order strength.
As the European semiconductor industry braces for its Q4 earnings announcements, Morgan Stanley has signaled a particular preference for wafer fabrication equipment (WFE) makers, with ASML and ASMI emerging as the firm’s top choices. The Wall Street bank’s evaluation emphasizes the importance of clear capital expenditure visibility and ongoing momentum in order flows, which they believe will shape the earnings season.
Leading the Q4 results calendar, ASML is slated to report on January 28, with Morgan Stanley anticipating a stronger order backlog in the December quarter compared to the previous one. This expected uptrend is attributed to solid demand from both logic chip producers and memory manufacturers. The analysts highlight the persistence of DRAM-driven demand dynamics, forecasting continued order momentum well into 2027, driven by a significant supply-demand imbalance impacting memory customers.
The bank’s team, headed by analyst Lee Simpson, notes a strong correlation between semiconductor equipment stocks and the DRAM cycle, implying substantial growth potential for ASML in the near to medium term. Moreover, recent guidance from TSMC has bolstered confidence in foundry spending patterns, underpinning strength in leading-edge foundries and consequently supporting favorable WFE order trajectories through at least 2027.
In their outlook, Morgan Stanley expects ASML’s management commentary to convey optimism for 2026, projecting double-digit sales growth. However, they anticipate that management will indicate a continued reduction in sales to China, albeit with a tempered tone compared to previous statements. Reflecting this confidence, Morgan Stanley has raised ASML's price target to €1,400.
Alongside ASML, ASMI also features prominently in Morgan Stanley’s recommendations prior to earnings disclosure. The bank recently increased ASMI’s price target to €825, citing shared structural drivers with ASML such as memory market recovery and sustained capital investment at cutting-edge foundries.
Within the analog semiconductor segment, Morgan Stanley has adjusted price targets upward for STMicroelectronics and Infineon to €22 and €45 respectively, while expressing a preference for STMicroelectronics ahead of its earnings announcement.
Contrastingly, the bank revised its price target for Arm downward from $180 to $135, though it maintained an Overweight rating. They view the recent stock price retreat as presenting a more attractive entry point for investors.
Morgan Stanley’s assessment reflects an overall positive outlook grounded in persistent structural investments within key semiconductor sub-sectors, with particular emphasis on memory and foundry capital expenditure trends. These insights are crucial for investors looking to navigate the European semiconductor market’s current earnings season effectively.
Risks
- Continued decline in sales to China may pressure revenue despite broader growth in other markets.
- Market sensitivity to semiconductor memory cycles could impact stock momentum if DRAM demand weakens.
- Stock price adjustments, such as Arm's lowered price target, signal valuation risks despite maintained investment ratings.