Morgan Stanley: Expects strong orders for ASML Holding NV ADR (ASML.US) in Q2 but pressure in the medium to long term, maintains "hold" rating.

ASML Holding NV ADR (ASML.US) will announce its second quarter results on July 16th. Morgan Stanley released a research report, predicting that ASML Holding NV ADR's second quarter order volume will be very substantial, benefiting from potential Chinese market demand and Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) overcoming challenges. However, looking at the mid to long term, Morgan Stanley expects growth to be more limited, as the slow increase in EUV technology layers affects expectations and valuations. The bank believes this impact is entirely negative, hence maintaining a "hold" rating, with a target price of 660 euros, reflecting cautious growth expectations. Morgan Stanley expects ASML Holding NV ADR's order volume in the second quarter of 2025 to exceed 4 billion euros, mainly due to the Chinese market and Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. The bank anticipates that the proportion of sales from the Chinese market in the 2025 fiscal year structure will increase, possibly from around 20% to around 25%. Morgan Stanley's forecasts align with the market consensus for revenues in fiscal years 2025 and 2026, remaining stable. Will shipment volumes remain strong in the second quarter of 2025? The market expects ASML Holding NV ADR to announce a robust performance report, with order amounts exceeding 4 billion euros. Morgan Stanley believes there is a possibility of an increase, due to (i) a turning point in Chinese demand, and (ii) a potential resurgence in EUV orders from Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR, which significantly decreased in the previous quarter. Morgan Stanley anticipates the company will also revise upward its sales ratio guidance for China in fiscal year 2025 (potentially reaching 27% to 29%, previously around 25%), and expects to achieve the midpoint of the revenue guidance range for fiscal year 2025 (325 billion euros, which Morgan Stanley also forecasts as 325 billion euros) (300 - 350 billion euros). Slowing growth in EUV technology layers From the N7 node (2017) to the N3 node (2023), ASML Holding NV ADR has seen significant increases in layers and values. During this period, the company's revenue increased from approximately 9 billion euros to around 28 billion euros (compound annual growth rate of about 20%, nearly double that of wafer fabrication equipment manufacturers (WFE), around 11%). The introduction of EUV technology in 2019 led to a significant acceleration in revenue. However, from now on, Morgan Stanley expects that as equipment performance growth relies entirely on shrinking rather than increasing layers, consistent with optical layer limits being reached, and consistent with layer growth reaching its limits. This cycle may be very different from the previous one Due to a lack of clear specific growth drivers, ASML Holding NV ADR must rely on capacity expansion and China's continued subsidy-supported spending. Although infrastructure construction remains strong, its impact on leading equipment expenditures in the field is relatively small. Lack of support from end markets such as personal computers and smartphones means Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is unlikely to see a significant capital expenditure growth as it did in the 2022 fiscal year in the upcoming years, until the 2027 fiscal year. Additionally, with a more efficient market structure (1 foundry instead of 3), Morgan Stanley predicts that ASML Holding NV ADR's revenue growth rate will stay at 11% to 13% in the 2024 to 2027 period.