'Buy on the dips': Morgan Stanley names its favorite stocks in European tech

Published Tue, Jan 16 20246:19 PM EST

Amala Balakrishner @in/amala-balakrishner @_amalabk

Europe's technology hardware sector's "roller coaster year" of 2023 ended on a strong note, and a cyclical recovery is now underway, according to Morgan Stanley. The Wall Street Bank is expecting investors to focus on a cyclical recovery and key themes such as artificial intelligence, advanced packaging, silicon carbide and gate-all-around transistors. Those themes can "drive earnings momentum throughout this year, especially in 2H24," Morgan Stanley's analysts led by Lee Simpson wrote in a Jan. 11 research note titled "2024 Outlook: buy on the dips." Against that backdrop, Morgan Stanley named its top overweight-rated stocks: semiconductor companies ASML , Besi , STMicroelectronics and Soitec ; industrial valve manufacturer VAT Group; and software company Synopsys . The stocks are listed in the order of Morgan Stanley's preference in the table above. Though the bank expects near-term weakness in the semiconductor names, it said it would "buy on the dips" as inventory corrections are finished. ASML The Dutch semiconductor equipment maker made Morgan Stanley's list, with a 12-month price target of 700 euros ($764.26), giving it around 7.8% upside. "We see ASML at the bottom of its order book cycle and expect a typical book to bill recovery in the coming quarters to provide growing confidence of growth across FY25 and into FY26," Morgan Stanley's analysts wrote. Besi The analysts said Besi is likely to be an "early beneficiary of a cyclical recovery." The investment bank also expects the company to benefit from a broadening adoption of hybrid bonding. The Dutch company, which the bank said "tends to beat consensus expectations in upcycles," was given a target price of 150 euros, or around 16.6% upside. STMicroelectronics Morgan Stanley said it likes the European chipmaker even though investors are bearish on it. "We remain surprised at how negative investor sentiment is on STMicro, which in the absence of major business transformations has shown it can better manage downturns; a tougher sales decline could even let the company show trough earnings power that will help the stock in the next cycle," the investment bank's analysts wrote. They expect the stock to "outperform on recovery" and thus gave it a target price 48 euros, or 20.8% upside potential. VAT Group This German company was among Morgan Stanley's top stocks, thanks to its exposure to the memory segment. "We see VAT as the EU name most exposed to memory and are Overweight on strong expected momentum," the bank's analysts said, giving the company a price target of 440 Swiss francs ($515.33), or around 10.6% upside. Other opportunities for VAT include its exposure to Chinese original equipment manufacturers, which are now taking share of the broader WFE (wafer fab equipment) market, they added. — CNBC's Michael Bloom contributed to this report.