Morgan Stanley analysts reduced their rating on ASML Holding (ASML) shares from Overweight to Equal-weight, and cut the price target from €925 to €800, citing “late-cycle dynamics” that could impact the company's earnings growth prospects in 2025 and 2026.
ASML shares slipped more than 1% in premarket trading Friday.
The downgrade reflects concerns over multiple headwinds, including a possible slowdown in semiconductor spending.
Approximately 46% of ASML's system sales in the second quarter of 2024 are expected to come from DRAM, a segment that could weaken according to Morgan Stanley's analysis. This anticipated decline in DRAM spending is part of a broader apprehension regarding a downturn in the semiconductor cycle.
On the other hand, Morgan Stanley acknowledges areas of strength for ASML, including High Bandwidth Memory (HBM) used in AI chips and spending on new technology nodes, particularly at TSMC (TSM).
Still, the firm also points to risks such as a slowdown in Intel's (NASDAQ:INTC) foundry sector and concerns over China's semiconductor capacity spending as we approach 2026.
The valuation of ASML has been a focus for investors, with the stock's price-to-earnings ratio peaking at 30-35x in July 2024 and the recent de-rating of ASML's stock "indicative of late-cycle share price action," analysts noted.
They maintain that ASML is a growth cyclical company with high-quality earnings but caution against overly optimistic expectations before the order book cycle reaches its peak.
Looking ahead, Morgan Stanley sees a possibility for ASML's valuation to improve by November 2024, coinciding with the company's Capital Markets Day. However, any re-rating is expected to be limited to mid-cycle multiples, factoring in the risks anticipated for 2026.