On the eve of ASML's earnings report, Morgan Stanley is firmly bullish: Q4 orders are expected to grow significantly, and 2027 will be a year of explosive performance

Dutch lithography giant ASML will release its financial report this Wednesday (January 28). Morgan Stanley expects the company to announce strong order data, while market focus is shifting from 2026 to 2027, which could be a key year for the company's performance explosion.

According to Wind Trading Desk, Morgan Stanley's latest research report maintains ASML's "Overweight" rating (Top Pick) and a target price of €1,400. The analyst team led by Lee Simpson stated in the report that ASML's fourth-quarter orders are expected to reach €7.27 billion, including 19 EUV low numerical aperture devices, significantly higher than the market's previous expectation of over €5 billion.

Regarding guidance, the analyst team emphasized that the market has largely digested the narrative of moderate growth in 2026, and a 10% revenue growth guidance would satisfy the market; the real investment opportunity lies in 2027 — the key year for ASML's performance explosion.

Morgan Stanley expects that ASML's demand for EUV equipment in 2027 could reach 80 units, driving revenue to €46.769 billion, a year-on-year increase of 28%, with gross margins expected to rise to 56%. This expectation is based on TSMC's early capacity expansion for the A14 process, large-scale catch-up investments from DRAM manufacturers, and a rebound in demand from logic chip manufacturers (including Intel and Samsung).

Order Expectations Significantly Upgraded: From €5 Billion to €7.2 Billion

Morgan Stanley expects ASML's fourth-quarter orders to reach €7.27 billion, including 19 EUV low numerical aperture devices. This expectation is a significant increase from the over €5 billion anticipated by investors in December last year, which included 10-15 EUV units.

Analysts pointed out that recent communications with buying institutions indicate that market expectations have risen to about 20 EUV units and over €7 billion.

It is worth noting that this will be ASML's last quarterly order data announcement. Starting from the next quarter, the company will only provide annual backlog order updates, making the order data in this financial report particularly important.

2026 Guidance: Focus on Revenue Growth and Stable Gross Margin

For the full-year outlook for 2026, Morgan Stanley believes the market's focus is concentrated on four aspects:

Revenue Growth Expectations: Analysts expect ASML to provide a growth guidance of about 10%, a level sufficient to meet market expectations. In recent quarters, any sales growth has been viewed by investors as a minimum requirement, but a 10% growth rate in the first quarter is considered acceptable.

Gross Margin Outlook: The gross margin for 2026 is expected to be 52.5%, only down 20 basis points year-on-year. Although the market's expectations for gross margin are not clear, most investors expect it to remain flat compared to last year.

EUV Revenue Growth: Investors expect EUV shipments to increase from about 40 units in 2025 to nearly 50 units in 2026. Due to some systems being the lower-priced 3600 model, EUV sales growth may fall within the range of 12-15%. Morgan Stanley's model is more optimistic, expecting shipments of over 50 EUV units in 2026, corresponding to about 20% year-on-year growth DUV Revenue Trends: There are differing expectations for DUV sales in China. Optimists expect ASML to eventually raise its guidance, but most analysts believe there will not be a "significant decline" in 2026, consistent with last quarter's guidance. In markets outside of China, the consensus is that DUV growth will lag behind EUV.

2027: A Year of Performance Explosion and Potential Capacity Bottlenecks

Morgan Stanley emphasizes that the focus of market debate is on 2027, not 2026. Analysts believe the story for 2026 is well understood by the market, and investor attention will shift to 2027.

The firm expects EUV demand to reach 80 units of low numerical aperture equipment in 2027, specifically allocated as follows: 40 units for Taiwan Semiconductor, 20 units for Samsung, and 6 units for Intel's foundry/IDM business. This expectation is based on three major drivers:

1. Massive DRAM Catch-Up Construction: After experiencing a super pricing cycle for commodity DRAM and HBM from Q4 2025 to Q3 2026 (covering HBM 3e/4/4e), a large-scale capacity expansion is expected in the second half of 2026 to 2027.

2. Strong Demand for Logic Chips: Including demand from Intel and Samsung, as well as an earlier-than-previously-expected capacity expansion for TSMC's A14 process.

3. DUV and High NA Contributions: DUV sales are expected to be around €15 billion, although there may be upside if NAND expansion exceeds expectations. Along with €9.9 billion from IBM's business and revenue recognition from about 6 high NA systems (€2-3 billion), total revenue in 2027 could reach €48.6 billion, with a gross margin of approximately 56%.

Capacity Bottleneck Alert: Potential Supply Tightness in 2027

The report raises a key risk: ASML's EUV capacity may reach its limits in 2027.

ASML previously stated it is working to achieve a capacity of 90 units of low NA EUV equipment and about 20 units of high NA equipment by the end of 2027, which matches its current available cleanroom space. However, if demand indeed reaches 80 units of low NA equipment in 2027, the capacity surplus will be very limited.

There are technical constraints: ASML cannot convert DUV production lines to EUV production lines because they use different light sources. Although it is theoretically possible to interchange low NA and high NA production lines, this requires the development of a "universal platform," which is a long-term plan aimed at 2030 and cannot address immediate issues.

To break through an annual capacity of over 100 units, ASML needs to first build new cleanroom space, which requires time and capital investment