Investor interest in the semiconductor sector has rebounded in recent months with the iShares Semiconductor ETF up nearly 50% from its October lows. Semiconductor equipment manufacturer ASML has been one such beneficiary. Shares in the Dutch firm have risen more than 23% year-to-date, but Morgan Stanley believes its rally still has legs. "We upgrade ASML's price target to 770 euros [$824] from 700 euros, maintaining our Overweight rating and sector Top Pick view," Morgan Stanley's analysts, led by Lee Simpson, wrote in a note on Feb. 13. This gives the stock potential upside of over 20% to its price of around 628 euros on Thursday. Why ASML is a top pick Morgan Stanley said ASML is a "high-quality" name that dominates its segment. It is the only firm in the world capable of making extreme ultraviolet (EUV) machines — highly complex machines that are needed to manufacture the most advanced chips. These machines, which cost up to $200 million apiece, shine exceptionally narrow beams of light onto silicon wafers, allowing more transistors to be fitted onto a chip. The bank said the key tenant of its overweight thesis on ASML lies in the "power of the company's critical tool supply," which makes ASML's earnings "more insulated" from spending volatility in the semiconductor sector. For the full fiscal year of 2022, ASML's net sales came in at 21.1 billion euros, a more than 13% year-on-year rise. The company expects sales for this year to grow over 25% compared to 2022. The semiconductor sector is notorious for its cyclicality and boom-bust cycles, but Morgan Stanley said 2023 will be a "recovery year" for semiconductors, as macro headwinds subside and demand for consumer devices remain sticky. The auto sector — an important end-user of chips — also remains resilient and will be a "key growth driver" for chip stocks, the bank added. — CNBC's Michael Bloom contributed to reporting
