Morgan Stanley turns more selective on European chip stocks

Investing.com -- Morgan Stanley has taken a more selective stance on European semiconductor stocks, staying positive on the sector overall while adjusting ratings and price targets as the memory cycle nears a turn and valuations diverge.

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

However, he added that with DRAM approaching a late-cycle inflection and valuation dispersion widening, "we turn more selective."

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

It kept an Overweight rating on ASML but lowered its target to €1,700 from €1,930, citing near-term overhangs around China, capacity and margins. Infineon's target was cut to €65 from €81 on limited near-term upside, while Besi's was reduced to €220 from €260.

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

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

The coverage has been volatile, up about 70% for the year before retreating around 60% from June peaks. Even so, Simpson said semis remain among the most-owned sectors and the pullback may offer attractive entry points.

Risks into year-end are said to include a possible shortfall in data center buildout, a tougher macro backdrop, a shift in the debate over large language models from growth to returns, and potential delays to 800-volt vehicle architecture.

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