Morgan Stanley upgrades this small cap semiconductor stock on auto cycle recovery

Investing.com -- Morgan Stanley (NYSE:MS) has upgraded shares of Melexis (EBR:MLXS) to Overweight, citing improving signs of recovery in the automotive semiconductor cycle and a favorable valuation setup.

The Wall Street firm also raised its price target to €80 from €60, based on a 20x multiple applied to fiscal 2026 (FY26) estimated earnings of €3.95.

“We are increasingly confident that we are in the early innings of an automotive semis cyclical recovery,” analysts said in a note, pointing to rising book-to-bill ratios and improving order trends.

Belgium-based chipmaker Melexis, which derives more than 85% of its revenue from the autos segment, is expected to benefit from this recovery phase after being hit by a five-quarter downturn that followed post-pandemic overordering and capacity stockpiling.

The company’s strong positioning in China is also seen as a key growth driver. The country accounted for 28% of Melexis’ first-quarter sales, and the company reported more design wins in China than in Europe for the first time in 4Q24.

Morgan Stanley believes that local chip ambitions in China are unlikely to materially displace Melexis, given its plan to manufacture in a China-based foundry starting in 2026.

Despite the stock’s recent rebound—up roughly 48% from April lows—Morgan Stanley argues that further upside remains. The shares still trade about 40% below their March 2023 peak and at a discount to long-term average valuation levels.

“This 20x multiple remains below Melexis’ median level (c.22x) and is broadly in line with European peers STM and IFX,” the analysts said.

“We continue to see incremental upside from current levels," they noted. 

Structural tailwinds such as increasing semiconductor content in premium vehicles and a long-term opportunity in robotics also support the investment case.

Melexis’ tactile sensor technology has secured the company a spot in Morgan Stanley’s “Humanoid 100” list, though material revenue contributions from robotics are not expected before 2028.

Morgan Stanley forecasts FY26 revenue of €961 million and EPS of €3.95, up from €947 million and €3.69 previously.

Over the medium to long term, the bank sees structural tailwinds from increased semiconductor content in modernized automotive platforms and the rise of robotics.

Morgan Stanley maintains Equal-weight ratings on the other small cap names, with a preference for Aixtron SE (ETR:AIXGn).