Morgan Stanley: AI computing power demand drives ASML Holding NV ADR (ASML.US) equipment boom, installed base business becomes second growth curve.

On October 14 local time, Morgan Stanley released its latest research report on ASML Holding NV ADR (ASML.US), maintaining an "Overweight" rating on the stock with a target price of EUR 1,700. As of October 13, ASML Holding NV ADR closed at EUR 1,509.60, leaving room for upside to the target price. Robust equipment demand driven by AI computing power chips has become the core engine driving the company's performance and order momentum. Based on disclosed third-quarter 2026 results, ASML Holding NV ADR reported total revenue of EUR 11.662 billion, broadly in line with market consensus; gross margin significantly beat expectations at 57.5%, 147 basis points above market expectations. Higher sales volume combined with business mix optimization, particularly the standout performance of the installed base management (IBM) business, which posted quarterly revenue of EUR 3.289 billion, 13 percentage points above expectations, became the key force lifting profitability. The installed base business, focused on equipment upgrades, retrofits, and maintenance, carries significantly higher profitability than new equipment sales and is becoming ASML Holding NV ADR's second growth curve. The order side conveys a high-prosperity signal for the industry's long cycle. Company management stated that order visibility now extends to 2030, with a large volume of confirmed orders already secured for 2028, red-hot market demand in 2029, and even some intended orders for 2030, reflecting strong capacity expansion willingness among downstream wafer fabs. Based on robust downstream demand, ASML Holding NV ADR raised its forward operating guidance. For the fourth quarter, the company guides revenue in the range of EUR 14.2-15.2 billion, with gross margin of 57%, of which the installed base management business is expected to generate revenue of EUR 3.7 billion, 23% above market expectations. Driven by the fourth-quarter guidance, full-year 2026 revenue guidance was narrowed to EUR 44-45 billion, at the upper end of the original EUR 42-46 billion range, with full-year gross margin guidance of 56%, 93 basis points above market consensus. However, robust demand also poses a test for the supply side. The market had previously expected low-NA EUV extreme ultraviolet lithography machine capacity to maintain a 30% compound growth rate in 2027-2028, with targets of more than 85 units shipped in 2027 and more than 110 units in 2028. But ASML Holding NV ADR stated bluntly that existing capacity targets can no longer match the real demand of downstream customers, and the company needs to further expand capacity, though it has not yet disclosed new capacity target figures. To alleviate the capacity gap, ASML Holding NV ADR has chosen a dual-track approach: on one hand, evaluating paths to expand complete-system manufacturing capacity; on the other hand, increasing delivery of equipment upgrade business, relying on retrofitting existing equipment and improving per-unit throughput to partially satisfy customers' capacity demands and reduce dependence on new complete-system equipment. Morgan Stanley values ASML Holding NV ADR at 27 times price-to-earnings, at the upper limit of its mid-term valuation range of 24-27 times, a valuation built on the basis of continued increases in wafer fab capital expenditure. The research report also flags two-way risks. On the upside, logic chipmakers' and HBM and DRAM memory capital expenditure beating expectations, further margin expansion in equipment services, and the implementation of semiconductor industry support policies across countries could all drive performance to beat expectations again. Downside risks should not be ignored either: if end-market consumer electronics and computing power demand weaken, it would trigger contraction in wafer fab capital expenditure and deferral of orders; in addition, lower-than-expected penetration of next-generation high-NA EUV equipment would also weigh on the company's valuation level. Overall, the AI wave continues to drive an explosive surge in lithography machine demand. Beyond traditional new equipment sales, installed base upgrade services have become an important pillar of profitability, but capacity bottlenecks and cyclical fluctuations in downstream capital expenditure remain core variables that the capital markets need to continuously track.