Critical Nature of Lithography to Shield ASML From Industry Downturn in 2023; Shares Undervalued

ASML reported fourth-quarter results slightly ahead of our expectations and in line with management’s guidance. Despite the industrywide slowdown in wafer fab equipment spending, or WFE, ASML’s position as the top lithography supplier has allowed it to emerge relatively unscathed. Management expects 2023 revenue to be up 25% year over year, whereas we expect WFE to be down at least 20%. We think the disconnect stems from ASML’s dominance in EUV lithography, one of the most critical technologies required by leading-edge chipmakers such as TSMC, Samsung, and Intel to continue advancing their process technologies to 3-nanometer and below to make the latest chips found in PCs, iPhones, and servers. In contrast, much of the semiconductor industry is dealing with elevated inventories and weaker demand, resulting in a pullback in memory and lagging-edge foundry/logic equipment spending that impacts ASML’s peers such as Applied Materials and Lam Research more significantly.