By Morgan Stanley downgraded ASML Holding NV (NASDAQ: ASML) on September 20 by cutting the stock’s rating from Overweight to Equal-weight.
The firm also revised its price target for ASML to €800 from €925, citing concerns about a potential slowdown in semiconductor capital expenditures and specific risks tied to weak capacity additions at Intel and a softening dynamic random-access memory (DRAM) cycle, expected to impact growth in 2025.
Despite the downgrade, Morgan Stanley acknowledged ASML’s strong earnings history but indicated that the risks around China’s demand and Intel’s challenges in the foundry business may weigh on the stock.
Other analysts are also cautious
The downgrade is part of a larger theme for ASML, as other analysts have expressed caution recently.
UBS, for example, lowered its rating earlier this month, seeing a “transition” year ahead for the company and reducing its price target to €900 from €1,050.
This highlights a growing concern that ASML’s earnings growth, particularly in the DRAM sector, may slow down due to global macroeconomic headwinds and more restrictive chip export policies.
The firm’s strong backlog, largely supported by orders for its advanced EUV lithography machines, is still seen as a long-term strength, but the near-term risks are gaining more attention.
In addition to the downgrade, ASML faces regulatory headwinds, particularly in China, where about half of its system sales are concentrated.
The Dutch government recently expanded export licensing requirements for some of ASML’s most advanced machines, tightening the company’s ability to sell certain models to Chinese clients.
This regulatory environment is expected to further complicate ASML’s outlook, especially as the US pressures its allies, including the Netherlands and Japan, to restrict advanced semiconductor exports to China.
ASML stock: HBM in demand
On the positive side, there is optimism around High Bandwidth Memory (HBM) growth, driven by AI demand.
ASML is expected to benefit from this sector’s resilience, particularly with companies like Taiwan Semiconductor Manufacturing Co. (TSMC) continuing to invest in high-tech nodes such as N2/A16.
Still, these growth areas may not be enough to offset the broader risks posed by China’s uncertainties and Intel’s weaker capacity outlook.
Despite the mixed outlook from analysts, ASML remains fundamentally sound, boasting a gross margin above 50% and an operating margin near 30%.
However, its exposure to cyclical downturns in the semiconductor industry could make it vulnerable, particularly as capital expenditures across the sector show signs of cooling off.
Additionally, ASML’s backlog, which stood at €39 billion in Q2, offers some protection but may not be enough to fully shield it from upcoming challenges.
Headwinds aside, ASML still has substantial tailwinds.
The adoption of its new High NA EUV machines, which are critical for advanced chip manufacturing, continues to gain traction.
Major clients like Intel and Samsung are set to place orders soon, reinforcing the company’s leadership in the semiconductor equipment market.
Additionally, the demand for AI chips and the shift to more advanced semiconductor nodes will likely support ASML’s long-term growth.
ASML stock valuation
The valuation of ASML, with its forward price-to-earnings (P/E) ratio currently hovering around 28x, which, while lower than its peak, remains elevated compared to historical averages.
The stock’s recent pullback has attracted some buyers, but with projected growth of just 13% for 2025-2030, compared to the previous 24% CAGR, some believe the stock may be priced too high for its slowing growth trajectory.
With all these factors at play, the stock’s future direction remains uncertain.
Now, to better understand what lies ahead, let’s turn to the charts and see what the technicals reveal about ASML’s price trajectory.
ASML stock shows a medium-term downtrend
ASML’s stock made its all-time high above $1100 in the first half of July this year but has been in a downtrend ever since the company reported its Q2 earnings on July 17.
Source: TradingView
This downtrend dragged the stock down to the $750 level, which was a previous resistance that has now turned into a support.
Although the stock remains in control of bears in the short to medium term, it offers a low-risk entry to bulls at current levels.
Investors who have a bullish outlook on the stock can initiate a long position near $790 with a stop loss at $748. If bullish momentum returns, we can see the stock near its all-time high again in the coming months.
Traders who are bearish on the stock must wait for it to either bounce back to $880 levels or fall below $755 before initiating fresh short positions.
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