ASML Faces Downgrade from Morgan Stanley: Are Semiconductor Stocks Losing Their Spark?

Analysts at Morgan Stanley (NYSE:MS) have downgraded their rating for ASML from Overweight to Equal-weight, trimming the price target from €925 to €800.

This adjustment stems from concerns over "late-cycle dynamics" that could hinder the company's earnings growth in 2025 and 2026.

As a result of this rating cut, ASML's shares dipped more than 1% in premarket trading on Friday. The downgrade points to emerging challenges that could stall momentum within the semiconductor sector, particularly a potential decline in spending related to semiconductor technologies. Notably, the firm anticipates that nearly 46% of ASML's sales in Q2 2024 will originate from the DRAM segment—a segment that Morgan Stanley predicts could experience further weakening.

ASML Stock Technical Analysis >>

However, it's not all doom and gloom for ASML. Morgan Stanley has recognized certain strongholds for the company, such as its progress in High Bandwidth Memory (HBM) technologies utilized in AI chip development and ongoing investments in new technology nodes, especially by TSMC (NASDAQ: TSM). Conversely, the potential for downturns in Intel's (NASDAQ: INTC) foundry sector and hesitance on China's semiconductor investments have also raised concerns about projected growth towards 2026.

The valuation landscape surrounding ASML has captured the attention of investors, particularly given that the stock’s price-to-earnings ratio reached peaks of 30-35x as of July 2024. Analysts suggest that the recent downgrade is symptomatic of "late-cycle share price action." While ASML remains a promising growth cyclical company known for its robust earnings, there are prudent warnings against embracing overly optimistic forecasts until the order book peaks are reached.

Looking toward the horizon, Morgan Stanley remains cautiously optimistic about the potential for ASML’s valuation to rebound in November 2024, aligning with the company’s Capital Markets Day. Nevertheless, any re-evaluation is projected to revert to mid-cycle multiples, incorporating the risks anticipated as we approach 2026.