Analysts at major Wall Street banks are more cautious on chip darling ASML, raising concerns about demand for the critical chip equipment maker. Earlier this week, investment bank UBS downgraded ASML to “neutral” and lowered its target price on the stock to 900 euros ($1,000.78) from 1,050 euros previously. In the note, UBS said it expects to see a “plateau in litho intensity” in both logic and memory chips, or the percentage of costs associated with lithography tools compared to other wafer fabrication equipment. ASML is behind a key technology involved in chip manufacturing known as EUV or extreme ultraviolet lithography. The company’s EUV machines generate large amounts of short-wavelength light to print small, complex designs on microchips. These tools are critical equipment for the semiconductor industry, with major firms from TSMC to Intel relying on ASML technology to manufacture their chips. Other Wall Street banks have since issued their own analyzes of ASML — and they’re weaker than before. Morgan Stanley followed UBS in lowering its price target for the stock to €925 from €1,000 previously, removing ASML from its basket of “top pick” stocks. The bank’s analysts stressed that they still see ASML as a “high-quality earnings growth cycle name”, but its valuation could “peak” at 30-35 times its price-to-earnings ratio in July. Still, the stock “could rerate from here as rewards outweigh risks,” Morgan Stanley said. Analysts at Morgan Stanley added that while AI infrastructure costs remain high, ASML may be vulnerable to a “discharge of overblown expectations” about the technology. ASML was a major beneficiary of the AI ​​boom earlier this year, with shares up as much as 50% year-to-date, hitting €1,002 at one point in July. However, ASML has seen a significant decline since then, falling nearly 30% from its all-time high. Analysts at Bank of America on Friday cut their price target on ASML shares to 1,064 euros from 1,302 euros previously, citing “lower EBITDA (earnings before interest, taxes, depreciation and amortization) estimates and lower multiples.” While the bank maintains ASML as its top pick for EU semiconductor stocks, it remains bullish on the stock. “We see the recent pullback as a particularly advanced buying opportunity,” the bank’s analysts said. Uncertainty over adoption of ‘High NA’ instrument One area of ​​concern to analysts was the timeline for adoption of ASML’s new generation of ‘High NA’ EUV machines. The NA number represents the aperture. These machines are expected to enable chipmakers to create even more complex chips to power the next generation of electronic devices. In a Morgan Stanley note, the bank said it expects ASML’s adoption of High NA machines to be “lumpy” and sees the risk of an “air gap” in 2026, further ramping up in 2027-28. Still, analysts at Morgan Stanley added that growth in advanced logic and memory chips bodes well for the recovery of ASML’s ongoing order book this year. UBS warned that ASML’s machines could face a drop in demand due to an “architectural shift” to switch to an all-architecture or GAA. GAA refers to a transistor design that places a gate on all four sides of the current flow channel to improve chip performance and energy efficiency. Another major factor that could affect ASML is semiconductor firms reusing existing inventory of ASML EUV they already own to produce new chips, rather than buying new equipment. UBS suggested that this trend is particularly strong among firms that produce memory chips. Several top memory chip makers work with ASML, including Samsung and Nvidia supplier SK Hynix. Morgan Stanley has warned of a “slowing of Installed Base Management (IBM) growth”, pointing to a potential peak in usage of its existing machines in 2025 and 2026. US-China restrictions could apply pressure on demand. Meanwhile, ASML is also the target of geopolitical winds. Another factor top bank analysts are wary of about ASML is that US-China tensions over trade and technology could exacerbate a possible slowdown in Chinese demand in the coming years. Morgan Stanley analysts said in a note on Thursday that they do not expect a significant drop in Chinese revenue: “We expect semi-finished equipment vendors, including ASML, to remain optimistic about Chinese demand for the rest of this year and into next year,” they said. next year, even if China declines in the overall sales mix. However, it said there are risks to the demand landscape in China, meaning a potential slowdown in demand in 2026 and possible changes in export restrictions could impact ASML sales in the medium to long term. The US government on Friday imposed new export controls on critical technologies, including advanced chip-making tools. The Biden administration previously imposed restrictions on ASML’s exports of advanced semiconductor equipment to China. Later on Friday, the Dutch government announced it would take over licensing requirements for ASML machines, effectively taking control of the firm’s exports to China. The government said that this step was aimed at protecting the national security of the Netherlands. ASML said in a statement on Friday that the latest measures marked a “technical change” that is not expected to have any impact on the financial outlook for 2024 or “longer-term scenarios”. ASML CEO Christophe Fuquet told a Citi conference in New York earlier this week that U.S. restrictions on the company were becoming more “economically justified” over time, adding that he expected more curbs to be pulled back. In a note from UBS on Wednesday, the bank said it expected China’s spending on lithography machines to normalize “following a strong push for localization in the context of trade tensions.” Analysts at the bank said they expect the share of ASML’s revenue from China to decline to 24% and 11% in 2025 and 2026, respectively. A great buying opportunity? Not all Wall Street banks have negative forward-looking views on ASML. Investment bank Jefferies said in a note to clients earlier this week that the move to a GAA architecture would have little impact on demand for ASML’s EUV machines, contrary to UBS’s view. Bank said lithography tools and GAA semiconductor architecture are “two sides of the same coin.” The firm said it saw weakness in ASML shares this week as a “huge buying opportunity” in a follow-up note following fresh US restrictions. Jefferies added that US-led trade restrictions on ASML have no impact on the company’s outlook for 2025 and beyond.
