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

ASML reported first-quarter results ahead of our expectations thanks to strong system sales. Despite the industrywide slowdown in wafer fab equipment, or WFE, 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.