Wall Street is no longer so bullish on tech darling ASML for a variety of reasons | Wilnesh News
Analysts at major Wall Street banks have become more cautious about chip darling ASML, raising concerns about the demand outlook for the key chip equipment maker. Earlier this week, investment bank UBS downgraded ASML to “neutral” and lowered its price target on the stock to 900 euros ($1,000.78) from the previous 1,050 euros. UBS said in the report that it expects “lithography intensity to plateau” in logic and storage wafers, which is the percentage of cost associated with lithography tools relative to other wafer fabrication equipment tools. ASML is behind a key technology in chip manufacturing called EUV (extreme ultraviolet lithography). The company’s EUV machines produce large amounts of short-wavelength light to print small, complex designs on microchips. These tools are key equipment in the semiconductor industry, with major companies from TSMC to Intel relying on ASML’s technology to produce wafers. Other Wall Street banks subsequently issued their own analyzes on ASML, which were more pessimistic than before. Morgan Stanley followed UBS in lowering its target price on the stock to 925 euros from the previous 1,000 euros and removing ASML from its “preferred” stock basket. Analysts at the bank emphasized that they still view ASML as a “growth cyclical name with high-quality earnings,” but that its valuation may have “peaked” in July at a price-to-earnings ratio of 30 to 35 times. Still, Morgan Stanley said, “we believe the stock can be re-rated from now on as the rewards outweigh the risks.” Morgan Stanley analysts added that while AI infrastructure spending remains high, ASML may be vulnerable to “the relief of lofty expectations” associated with the technology. ASML was a major beneficiary of the artificial intelligence momentum earlier this year, with the company’s shares rising 50% since the beginning of the year, peaking at €1,002 in July. However, ASML has since experienced a sharp decline, down nearly 30% from its all-time high. On Friday, Bank of America analysts lowered their price target on ASML shares to €1,064 from the previous €1,302, citing “lower EBITDA (earnings before interest, taxes, depreciation, and amortization) expectations and a lower price-to-earnings ratio.” However, the bank still said We are bullish on the stock and rank ASML as our top pick among EU semiconductor equipment stocks. “We view the recent pullback as a particularly enhanced buying opportunity,” the bank’s analysts said. Uncertainty over adoption of “high numerical aperture” tools One thing analysts are worried about is the adoption of ASML’s next-generation “high numerical aperture” EUV Machine schedule. NA stands for Numerical Aperture. The machines are expected to enable chipmakers to create more complex chips to power the next generation of electronic devices. Morgan Stanley said in the report that it expects adoption of ASML’s high-NA machines to be “unstable” and sees “risk of an ‘air gap’ in 2026, with growth more likely in 2027-28”. However, analysts at Morgan Stanley added that growth in cutting-edge logic and memory chips bodes well for ASML’s continued recovery in orders this year. UBS warned that ASML’s machines could face slowing demand due to an “architectural shift” to a gated architecture (GAA). GAA refers to a transistor design that places gates on all four sides of the current path to improve the performance and power efficiency of the chip. Another key factor that could put pressure on ASML is semiconductor companies repurposing existing inventory of ASML EUV they already have to produce new wafers, rather than buying new equipment. UBS said this trend is particularly evident among memory chip companies. Several top memory chip manufacturers have partnered with ASML, including Samsung and Nvidia supplier SK Hynix. Morgan Stanley warned that “installed base management (IBM) growth will slow”, citing usage of its existing machines likely to peak in 2025 and 2026. demand pressure. Another factor cited by top bank analysts in their caution on ASML is that U.S.-China trade and technology tensions could exacerbate a potential slowdown in Chinese demand in the coming years. “We expect semiconductor equipment suppliers, including ASML, to remain optimistic about China demand through the remainder of this year and into next year,” Morgan Stanley analysts said in a report on Thursday, adding that they did not expect China revenue to be lower. A sharp decline next year, even as the overall sales mix in China declines. However, the company said there are risks to demand conditions in China, with demand likely to slow in 2026 and export restrictions likely to change, which could further impact ASML’s mid- to long-term sales. The U.S. government on Friday introduced new export controls on critical technologies, including advanced chip-making tools. The Biden administration has previously imposed restrictions on ASML’s exports of advanced semiconductor equipment to China. Then on Friday, the Dutch government announced it would bring licensing requirements for ASML machines under its jurisdiction, effectively taking over control of the company’s exports to China. The government said the move was aimed at safeguarding Dutch national security. ASML said in a statement on Friday that the latest measures marked a “technical change” and did not expect to have any impact on its financial outlook for 2024 or its “long-term scenario.” ASML Chief Executive Christophe Fouquet told a Citi conference in New York earlier this week that U.S.-led restrictions on the company have become more “economically motivated” over time, adding that he expected the restrictions to There will be more resistance. UBS said in a report on Wednesday that it expects China’s spending on lithography machines to normalize after “a strong push for localization amid trade tensions.” Analysts at the bank said they expect ASML’s revenue share from China to fall by 24% in 2025 and 11% in 2026. A great buying opportunity? Not all Wall Street banks are pessimistic about ASML’s future. Contrary to UBS’s view, the move to the GAA architecture will have little impact on demand for ASML EUV machines, investment bank Jefferies said in a note to clients earlier this week. The bank said lithography tools and GAA semiconductor architecture are “two sides of the same coin.” In a follow-up note, the company said it viewed this week’s weakness in ASML stock as an “excellent buying opportunity” following the introduction of new restrictions in the United States. Jefferies added that it does not believe U.S.-led trade restrictions on ASML will have any impact on the company’s prospects in 2025 and subsequent years.
