Morgan Stanley turns more selective on European chip stocks

Morgan Stanley has adopted a more selective approach to European semiconductor stocks, maintaining an overall positive outlook on the sector while revising ratings and price targets as the memory cycle approaches an inflection and valuation gaps widen.

In a note released Tuesday, analyst Lee Simpson stated, "We remain constructive on semis, underpinned by strong AI demand and a broadening cycle recovery."

However, he cautioned that with DRAM nearing a late-cycle inflection point and valuation dispersion expanding, "we turn more selective."

The bank upgraded Synopsys to Overweight, shifted Infineon to Equal Weight, and trimmed price targets on ASML and BE Semiconductor.

It maintained its Overweight rating on ASML but reduced the target price to €1,700 from €1,930, citing near-term overhangs related to China, capacity, and margins. Infineon's target was cut to €65 from €81 due to limited near-term upside, while BE Semiconductor's target was lowered to €220 from €260.

Simpson said the sector's fundamentals remain supportive, with first-half industry data coming in stronger than expected, pointing to a broadening recovery, firmer pricing, and improving demand.

"The key wrinkle is memory," he wrote, observing that DRAM pricing appears close to a peak and the cycle is expected to turn late-cycle by the fourth quarter.

The group has been volatile, rising about 70% year-to-date before pulling back around 60% from June peaks. Nevertheless, Simpson said semiconductor stocks remain among the most widely held, and the pullback may offer attractive entry points.

Risks heading into year-end include a possible shortfall in data center construction, a more challenging macroeconomic backdrop, a shift in the debate over large language models from growth to returns, and potential delays to 800-volt vehicle architecture.