Morgan Stanley Names ASML a Top Investment Choice

A prominent Wall Street institution has cast a highly favorable outlook on the Dutch semiconductor equipment sector. In a significant move, Morgan Stanley has elevated ASML to a "Top Pick" status, suggesting the chip equipment manufacturer could be approaching a pivotal turnaround. This endorsement arrives after a prolonged period characterized by geopolitical tensions and inconsistent demand, prompting the market to consider whether this marks the beginning of a durable recovery phase.

The burgeoning demand for artificial intelligence is providing a substantial tailwind. Analyst Lee Simpson of Morgan Stanley points to Nvidia's recent commentary regarding "exceptional" demand for its Blackwell chips, which he interprets as a positive indicator for ASML's order books looking ahead to 2026 and 2027.

Furthermore, TSMC, the world's leading contract chipmaker, is undertaking a major expansion of its 3-nanometer production capacity. This growth necessitates additional Extreme Ultraviolet (EUV) lithography systems. According to Morgan Stanley's analysis, these required systems were "not yet part of the Q3 order backlog," indicating latent potential that has not been factored into current market forecasts.

Memory Chip Evolution Fuels EUV System Demand

The core of this renewed confidence is rooted in the DRAM production segment. Morgan Stanley's analyst Lee Simpson sees ASML as ideally positioned to capitalize on a technological shift within memory chips. Manufacturers are transitioning from older 1a and 1b production nodes to the more advanced 1c generation—a leap that requires a significantly greater number of EUV systems.

Simpson explains that "each technology transition leads to an increase in EUV layers," with the 1c node anticipated to require five to six layers in total. The direct consequence is rising demand for ASML's high-end machinery, which maintains a global monopoly on production.

Should investors sell immediately? Or is it worth buying Asml?

An intriguing development from discussions with ASML's management is that industry giants Samsung and SK Hynix have not yet finalized their orders for 2026. This leaves room for Samsung, in particular, to deliver positive surprises.

Resilient Margins Amidst DUV Challenges

Although ASML's Deep-Ultraviolet (DUV) business is projected to face headwinds in 2026, Morgan Stanley remains optimistic about the company's profitability. Simpson's forecasts include a gross margin of 52.3 percent—a decline of only 40 basis points from the previous year. The analyst describes this as "evidence of margin control during a difficult DUV year."

This resilience is attributed to three primary factors: increased sales of higher-margin EUV systems, a more profitable service segment, and an overall more attractive product mix. Even the anticipated 15 percent drop in demand from China is expected to be less severe than the company's own management had initially projected.

Widespread Analyst Consensus

Morgan Stanley is not alone in its bullish stance. Data from TipRanks shows that 16 analysts currently recommend buying ASML shares, while five advise holding. The average price target sits at nearly 966 euros, a figure Morgan Stanley now surpasses with its own target of 1,000 euros.

This new price target suggests considerable upside potential. Simpson refers to the current share price as an "attractive entry point," anticipating that other market experts will revise their earnings estimates upward once the recovery cycle becomes more evident. ASML's technological leadership in advanced lithography and the multiple demand drivers converging from different sectors position the company as a strategic beneficiary of the next semiconductor upturn.