Morgan Stanley Turns Selective on European Chip Stocks, Citing Memory Cycle Peak

Morgan Stanley has adopted a more selective stance on European semiconductor stocks, adjusting ratings and price targets for several key companies. The bank remains positive on the sector's fundamentals but cited a potential inflection point in the memory cycle and widening valuation gaps as reasons for a more nuanced approach.

In a research note published Tuesday, analyst Lee Simpson stated, "We remain constructive on semis, underpinned by strong AI demand and a broadening cycle recovery." However, he added that with DRAM pricing approaching a late-cycle peak, "we turn more selective."

Key Rating and Target Changes

Morgan Stanley's updated coverage includes several significant adjustments for major European semiconductor firms:

• Infineon (IFXGn): Downgraded to Equal Weight from a previous positive rating. The price target was cut to €65 from €81, with the bank noting limited near-term upside potential.
• ASML (ASML): The Overweight rating was maintained, but the price target was lowered to €1,700 from €1,930. The adjustment reflects what the bank called near-term overhangs related to China, production capacity, and margins.
• BE Semiconductor (BESI): The price target was reduced to €220 from €260.

As part of its broader semiconductor review, the bank also upgraded U.S.-based Synopsys (SNPS) to Overweight.

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Memory Cycle and Market Outlook

The primary driver for the bank's increased selectivity is the memory chip market. According to the note, DRAM pricing appears to be nearing a peak, and the cycle is anticipated to turn "late-cycle" by the fourth quarter. This development introduces a "key wrinkle" into an otherwise supportive environment characterized by strong AI-driven demand and a broad recovery.

Despite the adjustments, Morgan Stanley noted that the semiconductor sector has performed strongly, rising about 70% for the year before a significant retreat from its June peaks. The bank suggested that the recent pullback may offer attractive entry points for investors, as semiconductors remain one of the most widely owned sectors.

Potential Headwinds

Looking toward the end of the year, Morgan Stanley identified several potential risks for the sector. These include a possible shortfall in data center construction, a more challenging macroeconomic backdrop, and potential delays in the adoption of 800-volt electric vehicle architecture. The note also mentioned a potential shift in the debate around large language models from a focus on growth to one on returns.