Ahead of its earnings report this Wednesday, Dutch lithography giant ASML is expected by Morgan Stanley to announce strong order data. Market focus is shifting from 2026 to 2027, with the latter potentially becoming a pivotal year for a significant earnings surge.

According to market analysis, Morgan Stanley's latest research report maintains an "Overweight" rating (Top Pick) and a €1,400 price target for ASML. The analyst team led by Lee Simpson stated in the report that they expect ASML's fourth-quarter orders to reach €7.27 billion, including 19 Low-NA EUV units, 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 for 2026, and a 10% revenue growth guidance would satisfy investors. The real investment opportunity lies in 2027—the key year for ASML's earnings breakout.

Morgan Stanley forecasts that ASML's EUV equipment demand could reach 80 units in 2027, driving revenue to €46.769 billion, a 28% year-over-year increase, with gross margins potentially improving to 56%. This projection is based on TSMC's earlier-than-expected A14 process capacity expansion, massive catch-up investments by DRAM manufacturers, and a recovery in demand from logic chip makers, including Intel and Samsung.

Order expectations have been significantly revised upwards: from €5 billion to over €7 billion. Morgan Stanley expects ASML's Q4 orders to reach €7.27 billion, including 19 Low-NA EUV units. This is a substantial increase from the widespread investor expectation in December of over €5 billion and 10-15 EUV units.

Analysts noted that recent discussions with buy-side institutions indicate market expectations have already risen to approximately 20 EUV units and over €7 billion.

It is noteworthy that this will be the last time ASML discloses quarterly order data. Starting next quarter, the company will only provide annual backlog updates, making the order figures in this earnings report particularly significant.

2026 Guidance: Focus on Revenue Growth and Stable Margins For the full-year 2026 outlook, Morgan Stanley believes market focus centers on four key areas: Revenue Growth Expectations: Analysts expect ASML to provide guidance of around 10% growth, a level sufficient to meet market expectations. Over recent quarters, any sales growth has been seen by investors as a minimum requirement, but a 10% growth rate is now considered acceptable. Gross Margin Outlook: The forecast for 2026 gross margin is 52.5%, down only 20 basis points year-over-year. Although market expectations for margins are not clearly defined, most investors anticipate they will be roughly in line with the previous year. EUV Revenue Growth: Investors expect EUV shipments to increase from around 40 units in 2025 to nearly 50 units in 2026. As some systems are the lower-priced 3600D model, EUV sales growth is likely to be in the 12-15% range. Morgan Stanley's model is more optimistic, forecasting over 50 EUV shipments in 2026, corresponding to approximately 20% year-over-year growth. DUV Revenue Trends: Expectations for DUV sales to China are divided. Optimists anticipate ASML will eventually raise its guidance, but most analysts do not expect a "significant decline" in 2026, consistent with last quarter's guidance. For markets outside China, the consensus is that DUV growth will be slower than EUV growth.

2027: The Breakout Year and Potential Capacity Bottlenecks Morgan Stanley emphasizes that the focus of market debate is 2027, not 2026. Analysts believe the story for 2026 is already well understood by the market, and investor attention will shift to 2027.

The bank forecasts 2027 Low-NA EUV demand could reach 80 units, allocated as follows: 40 for TSMC, 20 for Samsung, and 6 for Intel's foundry/IDM business. This expectation is based on three key drivers:

Massive DRAM Catch-up Construction: Following a super pricing cycle for commodity DRAM and HBM from Q4 2025 to Q3 2026, massive capacity expansion is expected from H2 2026 into 2027.

Strong Logic Chip Demand: Including demand from Intel and Samsung, as well as TSMC's A14 process capacity expansion starting earlier than previously anticipated.

DUV and High-NA Contribution: DUV sales are forecast at approximately €15 billion, with potential upside if NAND capacity expansion exceeds expectations. Combined with €9.9 billion from the Installed Base Management business and revenue recognition for about 6 High-NA systems (€2-3 billion), total 2027 revenue could reach €48.6 billion, with gross margins around 56%.

Capacity Bottleneck Alert: Potential Supply Tightness in 2027 The report raises a key risk: ASML's EUV capacity could reach its limit in 2027.

ASML has previously stated it is working towards a capacity of 90 Low-NA EUV units and approximately 20 High-NA units by the end of 2027, which aligns with its current available cleanroom space. However, if 2027 demand indeed reaches 80 Low-NA units, capacity headroom will be extremely limited.

Technical constraints exist: ASML cannot convert DUV production lines to EUV lines as they use different light sources. While theoretically possible to make Low-NA and High-NA lines interchangeable, this would require developing a "universal platform," which is a long-term plan for 2030 and cannot address near-term issues.

To exceed an annual capacity of 100 units, ASML would first need to construct new cleanroom space, a process requiring significant time and capital investment.