The early landing of 3nm and the explosive demand for DRAM, is ASML's profit reversal coming?

After a long downward cycle of 14 months, ASML's new growth momentum seems to be emerging.

According to news from the Chasing Wind Trading Desk, a research report released by Morgan Stanley on November 26 shows that the global lithography giant ASML is experiencing a dual boost from the demand for DRAM and advanced logic chips, with a positive growth momentum expected in the fiscal years 2026 to 2027.

Strong DRAM Cycle, EUV Lithography Demand Supported

Morgan Stanley emphasized that the strong demand in the DRAM (Dynamic Random Access Memory) market is evident. Furthermore, "ASML continues to have solid demand during the DRAM technology transition," especially in the shift from the 1a and 1b nodes to the 1γ/1c nodes.

The iteration of DRAM technology is crucial for enhancing lithography intensity. The report analyzes that each evolution of the technology node will "lead to an increase in the number of EUV lithography layers." For example, "at the 1c node, a total of 5-6 lithography layers are required." This highlights the sustained demand momentum for EUV (Extreme Ultraviolet) lithography systems in the DRAM market.

Specifically regarding customers, the report believes that the demand from Samsung and SK Hynix in the fiscal year 2026 "is clear." Additionally, the report adds that the demand for commodity DRAM and the "strong price increases witnessed in the market" have also contributed to order growth.

3nm May Arrive Early, AI Giants' Demand Becomes Key Catalyst

In the wafer foundry sector, positive signals are also emerging. A key finding of the report is that "TSMC is testing the original graphic performance of 3nm, and the adoption time at its Arizona plant may be earlier than the initially planned 2028."

ASML benefits from TSMC's 3nm process technology, as TSMC's advanced 3nm process relies on ASML's EUV lithography machines, enabling TSMC to produce chips that are more powerful, consume less power, and are smaller in size.

At the same time, the booming AI sector is indirectly creating demand for ASML. The report cites NVIDIA's record quarterly revenue, with CEO Jensen Huang describing the market interest in the Blackwell series GPUs as "off the chart."

Morgan Stanley believes this will "support ASML's supply of wafer foundry equipment in the fiscal years 2026/27," as NVIDIA's strong demand is expected to drive TSMC to expand its 3nm capacity, thereby requiring more EUV lithography machines.

Emerging from a 14-Month Downturn, Valuation Reassessment Cycle Begins

The report states that ASML is emerging from a long downturn cycle. Previous cycles typically led to ASML's two-year forward P/E ratio compressing from 30-35 times to 18-22 times within 8-10 months. However, due to geopolitical uncertainties such as tariffs, trade tensions, and export restrictions, this downturn cycle has lasted over 14 months (from July 2024 to September 2025) Morgan Stanley pointed out that last year's downturn was mainly attributed to weak foundry spending from companies other than Taiwan Semiconductor (such as Intel and Samsung) and insufficient order momentum. Additionally, investor concerns about the Asian market and fears of declining lithography intensity exacerbated this trend. However, currently, concerns about lithography intensity and pricing pressure have largely dissipated, and Morgan Stanley even expects the average selling price (ASP) of EUV to rise due to Taiwan Semiconductor adopting computational lithography technology.

Since the summer, market sentiment has shifted. With rising commodity DRAM prices and progress on Samsung's HBM3e/HBM4, evidence of a "memory super cycle" is increasingly apparent. Morgan Stanley believes that Taiwan Semiconductor's robust performance and NVIDIA's shift to the A16 chip with the Rubin architecture confirm that ASML's earnings revaluation cycle has officially begun.

Profit Margins Resilient, but Some Businesses Face Slowdown

Despite the optimistic outlook, ASML is not without challenges. The report forecasts that sales in the DUV (Deep Ultraviolet Lithography) business will decline year-on-year, mainly due to weakened demand expectations in a key Asian market. Morgan Stanley maintains a "year-on-year decline of about 15%" in sales for this market in its model, which is slightly more optimistic than the 15-20% guidance range provided by ASML's management.

However, the report emphasizes that ASML's profit margins remain resilient. Analysts noted after discussions with management that two key factors will support profit margins: first, "higher EUV sales" in fiscal year 2026 (model predicts 48 units, compared to 41 units this year); second, the profit contribution from "Installed Base Management (IBM)" business.

The report believes that as EUV installations increase, the profit margins of service businesses will improve.

Considering these factors, Morgan Stanley forecasts ASML's gross margin for fiscal year 2026 to be 52.3%, only slightly down 40 basis points from the 52.7% expected for fiscal year 2025. The report states, "We believe this demonstrates the company's ability to control margins during a challenging DUV year."

Based on these positive outlooks, Morgan Stanley ultimately decided, "We are raising our target price from €975 to €1000 and maintaining an overweight rating. Given the recent decline in stock prices, we view this as an 'attractive entry point for the stock' and have upgraded ASML to our top pick in the European semiconductor sector."

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