On October 14 local time, Morgan Stanley released its latest research report on ASML (ASML.US), maintaining an "Overweight" rating with a target price of 1700 euros. As of October 13, ASML closed at 1509.60 euros, leaving room for upside to the target price.
Robust equipment demand driven by AI compute chips has become the core engine powering the company's performance and order momentum. According to disclosed third-quarter 2026 results, ASML generated total revenue of 11.662 billion euros, broadly in line with market consensus. Gross margin significantly beat expectations, coming in at 57.5%, 147 basis points above market forecasts. Higher sales volume combined with business mix optimization, especially the standout performance of the installed base management (IBM) business, which posted quarterly revenue of 3.289 billion euros, exceeding expectations by 13 percentage points, became the key force lifting profitability. The installed base business, focused primarily on equipment upgrades, retrofits, and maintenance, carries significantly higher margins than new equipment sales and is emerging as ASML's second growth curve.
The order side conveys strong signals of a long-cycle industry upswing. Company management stated that order visibility now extends to 2030, with substantial confirmed orders already secured for 2028, red-hot market demand for 2029, and even some intention orders for 2030, as downstream wafer fab expansion appetite remains strong.
Based on robust downstream demand, ASML raised its forward operating guidance. For the fourth quarter, the company guided revenue in the range of 14.2-15.2 billion euros with a gross margin of 57%, of which the installed base management business is expected to generate 3.7 billion euros in revenue, 23% above market expectations. Driven by the fourth-quarter guidance, full-year 2026 revenue guidance was tightened to 44-45 billion euros, landing at the upper end of the previous 42-46 billion euro range, with a full-year gross margin guidance of 56%, 93 basis points above market consensus.
However, surging demand also poses challenges on 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 stated plainly that existing capacity targets can no longer match the real demand from downstream customers, and the company needs to further expand capacity, though it has not yet disclosed new capacity target figures.
To ease the capacity gap, ASML 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 boosting per-unit throughput to partially satisfy customers' capacity demands and reduce dependence on newly added complete-system equipment.
Morgan Stanley values ASML at 27 times price-to-earnings, at the upper limit of its mid-cycle 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, better-than-expected capital expenditure from logic chip makers and HBM and DRAM memory, further margin expansion in equipment services, and the rollout of semiconductor industry support policies across countries could all drive results to beat expectations again. Downside risks should not be ignored either: if end-market consumer electronics and compute demand weaken, it would trigger a contraction in wafer fab capital expenditure and push orders out to later periods; in addition, lower-than-expected penetration of next-generation high-NA EUV equipment would also weigh on the company's valuation.
Overall, the AI wave continues to drive an explosion in lithography machine demand, and beyond traditional new equipment sales, installed base upgrade services have become an important pillar of profitability. However, capacity bottlenecks and cyclical fluctuations in downstream capital expenditure remain core variables that the capital markets need to keep tracking.
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