ASML Earnings: Mounting Headwinds Fail to Hinder Strong Lithography Demand, Making Shares Attractive

ASML ASML reported first-quarter results ahead of our expectations thanks to strong system sales. Despite the industrywide slowdown in wafer fab equipment spending, ASML has been relatively unscathed thanks to its dominance in EUV lithography, which is one of the most critical technologies required by advanced chipmakers such as TSMC to make the latest chips found in PCs, iPhones, and data centers. Management reiterated its outlook for 2023 revenue to be up 25% year over year, whereas we expect overall WFE to be down at least 20% as most of the chip space deals with elevated inventories and weaker consumer electronics demand. Concerning the latest round of export restrictions to China, management is confident ASML will still be able to ship older lithography tools to Chinese chipmakers that produce less sophisticated chips for automotive and industrial applications. We suspect the market is concerned this may not be the case and demand for non-EUV tools may not be picked up by non-China customers in the event restrictions tighten further.

We are maintaining our fair value estimate at $760/EUR 700 per share. Although the shares of this wide-moat firm remain undervalued, we note they are up nearly 65% from recent lows in the middle of October.

First-quarter sales were EUR 6.7 billion, up 5% sequentially. EUV revenue was about EUR 2.9 billion, with nine tools shipped but revenue recognized from 17 tools, as the firm catches up from tools shipped in 2022 in nonfinal configuration. Installed base management (services) revenue fell 17% sequentially due to fewer tool upgrades and lower utilization levels at customers’ fabs due to weaker end-market demand. We see this segment remaining challenged as macro headwinds persist. Gross margins of 50.6% fell 90 basis points sequentially due to lower services sales.

Second-quarter revenue is expected to be EUR 6.5 billion-EUR 7.0 billion.