3nm arrives ahead of schedule, DRAM demand surges—Is ASML’s profitability about to turn around?

Emerging from a prolonged 14-month downturn, ASML’s new drivers of growth seem to be surfacing.

According to Chasewind Trading Desk, a Morgan Stanley research report released on November 26th indicates that global lithography giant ASML is benefiting from dual boosts in demand for DRAM and advanced logic chips, showing positive growth momentum for its 2026 through 2027 fiscal years.

Strong DRAM cycle supports demand for EUV lithography machines

Morgan Stanley highlights that the hot demand in the DRAM (Dynamic Random Access Memory) market is evident. “ASML continues to have solid demand during the DRAM technological transition,” especially in the shift from the 1a and 1b nodes to the 1γ/1c nodes.

Technological upgrades in DRAM are crucial for increased lithography intensity. The report analyzes that each evolution in technology node will “result in an increased number of EUV lithography layers.” For example, “at the 1c node, a total of 5-6 lithography layers are required.” This underscores the ongoing demand momentum for EUV (Extreme Ultraviolet) lithography systems in the DRAM market.

Specifically regarding clients, the report sees Samsung and SK Hynix’s demand in the 2026 fiscal year as “certain.” Additionally, the report adds that demand for commodity DRAM and the “robust price increase witnessed by the market” also contribute to order growth.

3nm may land ahead of schedule; AI giants’ demand is a key catalyst

Positive signals are also emerging in the foundry sector. One key finding from the report is that “TSMC is testing original 3nm graphics performance, and adoption at its Arizona plant may happen earlier than initially planned in 2028.”

ASML benefits from TSMC’s 3nm process technology, as the advanced process depends on ASML’s EUV lithography machines, enabling TSMC to produce more powerful, energy-efficient, and smaller chips.

Meanwhile, the rapid growth of AI is indirectly creating demand for ASML. The report cites Nvidia’s record quarterly revenue, with CEO Jensen Huang describing market interest in the Blackwell series GPUs as “off the chart” during an earnings call.

Morgan Stanley believes this “will support ASML’s foundry equipment supply in the 2026/27 fiscal years,” as Nvidia’s strong demand is expected to prompt TSMC to expand 3nm production capacity, thereby requiring more EUV lithography machines.

Emerging from a 14-month downturn, the valuation re-rating cycle begins

The report states that ASML is coming out of a prolonged down period. Previous cycles typically saw ASML’s two-year forward P/E compressing from 30-35 times to 18-22 times within 8-10 months. However, affected by geopolitical uncertainties such as tariffs, trade tensions, and export restrictions, this downturn lasted more than 14 months (from July 2024 to September 2025).

Morgan Stanley points out that last year's downturn was mainly due to sluggish foundry spending, excluding TSMC (such as Intel and Samsung), and insufficient order momentum. Additionally, investor concerns about the Asian market and fears over reduced lithography intensity exacerbated the trend. At present, concerns over lithography intensity and pricing pressures have basically been eliminated, and Morgan Stanley even expects average selling prices (ASP) of EUV tools to rise due to TSMC’s adoption of computational lithography technology.

Since the summer, market sentiment has shifted. With rising commodity DRAM prices and progress in Samsung's HBM3e/HBM4, evidence of a “memory super cycle” is mounting. Morgan Stanley believes that TSMC’s robust performance and Nvidia’s Rubin architecture transition to A16 chips confirm that ASML’s profitability re-rating cycle has officially begun.

Resilient profit margins, though some business lines face slowdown

Despite the optimistic outlook, ASML does face challenges. The report foresees DUV (Deep Ultraviolet Lithography) business sales declining year-over-year, mainly due to weakened demand expectations in a key Asian market. Morgan Stanley’s model maintains an “approximate 15% YoY decline” in sales for that market, slightly more optimistic than ASML management’s guidance of 15-20%.

Nevertheless, the report emphasizes ASML’s resilient profit margins. After discussion with management, analysts note two factors will support margin: First, “higher EUV sales” in fiscal 2026 (model predicts 48 units, versus 41 this year); and second, profit contribution from the “Installed Base Management (IBM)” business.

The report believes that as EUV installations increase, service business profit margins will improve.

Taking all these factors into account, Morgan Stanley forecasts a 2026 gross margin for ASML at 52.3%, only a slight 40 basis point decrease from the projected 52.7% for 2025. The report says, “We believe this shows the company’s ability to control margins in challenging DUV years.”

Based on these positive outlooks, Morgan Stanley ultimately decided, “We raise our target price from €975 to €1000 and maintain an ‘Overweight’ rating. Considering the recent stock price declines, we see this as an ‘attractive entry point’ and raise ASML to our Top Pick in the European semiconductor sector.”

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The above highlights are from the Chasewind Trading Desk.

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