Morgan Stanley Turns More Bullish on Key Japanese AI Chip Equipment Makers

Key Moments

Recovery in Front-End Equipment Demand

Investing.com — Morgan Stanley raised its view on two Japanese semiconductor equipment makers. The bank cited a clear rebound in front-end equipment demand tied to AI-related capital spending.

Following meetings at SEMICON Japan, analyst Tetsuya Wadaki told clients that the firm upgraded Tokyo Electron and Kokusai Electric to Overweight. He pointed to a clear turning point in industry conditions.

“We believe the front-end equipment market entered a full recovery phase in mid-November,” the analysts said. Moreover, they noted that equipment inquiries have surged sharply over the past month.

Stronger Order Inquiries From Foundries and Memory Makers

During booth tours on Dec. 18, Morgan Stanley met with several semiconductor equipment manufacturers. Management teams consistently highlighted a rapid acceleration in customer demand.

“All companies noted that from mid-November to December 2025, inquiries from foundries and DRAM makers increased rapidly,” the firm said.

Importantly, the improvement is being driven by higher spending from Taiwanese foundries focused on AI chips. At the same time, tight supply conditions in memory markets are supporting demand.

Specifically, Morgan Stanley cited additional AI-related investments by Taiwan-based foundries and significant DRAM supply shortages as the key drivers of the upturn.

Revised Valuation Framework and Price Targets

Given the stronger earnings outlook, Morgan Stanley said it is adjusting its valuation approach for both companies. The bank is now shifting to a recovery-phase framework.

For Tokyo Electron and Kokusai Electric, Morgan Stanley said it is switching its target P/E. Instead of using 14.0x during corrections, it is now applying 20.0x for recovery phases.

Overall, the higher price targets reflect improved earnings visibility. Morgan Stanley expects AI-driven and memory-related investment cycles to continue strengthening.