Company Reports

ASML's weak new bookings of EUR 3.6 billion this quarter have left investors wondering where the firm's 2025 sales, estimated between EUR 30 and 40 billion by management, will ultimately land. The uncertainty on new bookings sent shares down 5% in early morning trading. The prior quarter had been exceptional, with ASML booking all-time-high orders of EUR 9.2 billion, setting a high benchmark. In our view, investors were overly optimistic last quarter and more pessimistic this quarter. ASML's new orders are normally lumpy given the low volume and high price tag of extreme and deep ultraviolet lithography machines, or EUV and DUV. What's clear to us is that ASML's long-term story remains unchanged, supported, for instance, by new plans from customers TSMC and Samsung, which aim to invest more than $20 billion each in additional fabs in the US, among other projects. Aside from equipment shipments, management expects other tailwinds to kick in in 2025. These include the introduction of the NXE:3800 EUV machine, which comes at higher average selling prices and gross margins; more improvement in EUV service margins; and better operational leverage from higher volumes of high-NA EUV machines. We raise our fair value estimate by 13% to EUR 790, supported by improved revenue and margin forecasts long term. Our fair value estimate represents a 42 and 32 times forward 2024 and 2025 P/E ratio, respectively.

We believe ASML will remain the top lithography equipment provider in semiconductor foundries for at least the next two decades. Taiwan Semiconductor Manufacturing, Intel, and Samsung’s fabs were redesigned one decade ago to make them suitable for extreme ultraviolet lithography, or EUV, a costly and long endeavor, so it is quite unlikely ASML will be displaced from its place in the foundry. In addition, no competitor has yet matched ASML’s technological leadership and the company’s competitive advantage will likely keep expanding as it grows its already-high EUR 4 billion research and development budget.

Wide-moat ASML's quarterly results surprised investors as it recorded very strong bookings of EUR 9.2 billion, sending the shares up 6% intraday. This comes after weaker bookings during the first nine months of 2023 (EUR 10.9 billion cumulatively) as foundries moderated their tool orders given the overall macroeconomic slowdown. We expect healthy orders through 2024 due to: (1) strong fab openings expected in 2025 (Taiwan Semiconductor Manufacturing, Intel, and Samsung), and (2) strong demand from Chinese customers in anticipation of further export restriction controls. Revenue from China has seen a fourfold increase in the past two quarters and we expect Chinese demand will remain high through 2024 for the same reason. Revenue and EBIT grew 30% and 39%, respectively, to EUR 27.6 and EUR 9.0 billion for the full year. We expect only slight sales growth in 2024, in line with management’s comments, followed by double-digit growth of almost 20% in 2025, with revenue reaching EUR 34.2 billion compared with management’s guidance of EUR 30 billion to EUR 40 billion. We maintain our EUR 700 fair value estimate, with shares trading in EUR 750 territory after the Jan. 24 results, representing a 33 times enterprise value/EBIT (2023) multiple.

We believe ASML will remain the top lithography equipment provider in semiconductor foundries for at least the next two decades. Taiwan Semiconductor Manufacturing, Intel, and Samsung’s fabs were redesigned one decade ago to make them suitable for extreme ultraviolet lithography, a costly and long endeavor, so it is quite unlikely ASML will be displaced from its place in the foundry. In addition, no competitor has yet matched ASML’s technological leadership and the company’s competitive advantage will likely keep expanding as it grows its already high EUR 4 billion research and development budget.

We reinitiate coverage of ASML, maintaining our EUR 700 fair value estimate and wide moat supported by intangible assets, cost advantages, and switching costs. We believe ASML will remain the top lithography provider for semiconductor foundries, or fabs, over the next 2 decades due to its technological leadership, large research and development budget, which acts as a barrier to entry, and high switching costs for fabs, whose plants are designed around ASML’s lithography machines. We also maintain our Exemplary Morningstar Capital Allocation Rating for the firm. ASML shares are undervalued by 10%, trading in EUR 630 territory.

We believe ASML will remain the top lithography equipment provider in semiconductor foundries for at least the next two decades. Taiwan Semiconductor Manufacturing Company, Intel and Samsung’s fabs were redesigned one decade ago to make them suitable for extreme ultraviolet lithography, a costly endeavor, so it is quite unlikely ASML will be displaced from its place in the foundry. In addition, no competitor has yet matched ASML’s technological leadership and the company’s competitive advantage will likely keep expanding as it grows its already high EUR 3 billion research and development budget.

We maintain our $750 fair value estimate for shares of wide-moat ASML after the firm's third-quarter results met our expectations. ASML continues to enjoy strong growth in 2023 despite a soft chip market, in large part due to immense demand out of China for trailing-edge systems. We expect this demand to moderate going forward, both organically and due to recently updated U.S. export restrictions. Nonetheless, we believe ASML will make up for it with demand in other geographies. We like management's longer-term commentary for a robust year in 2025, with rebounds in both the logic and memory markets. We continue to see ASML as a blue-chip firm with a strong grip on the lithography market that will enable durable long-term growth. We see shares as nicely undervalued.

We maintain our $750 per share fair value estimate for ASML following solid second-quarter results that fell mostly in line with our expectations. ASML topped out its guidance for sales and margins in the second quarter and raised its full-year guidance, but the demand backdrop for many of its chipmaking customers remains weak. Memory customers in particular continue to wrestle with an especially severe downturn. Still, ASML holds an impressive backlog of orders that we expect will allow it to post strong growth through 2023 and 2024. Shares dipped on macro commentary, but we’d encourage investors to seek a greater discount before picking up shares.

ASML is the predominant supplier of photolithography equipment for semiconductor manufacturers. We expect it to materially benefit from the proliferation of extreme ultraviolet, or EUV, lithography at leading-edge chipmakers, which we believe justifies ASML's wide economic moat rating.

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.

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.

ASML is the predominant supplier of photolithography equipment for semiconductor manufacturers. We expect it to materially benefit from the proliferation of extreme ultraviolet, or EUV, lithography at leading-edge chipmakers, which we believe justifies ASML's wide economic moat rating.

On Nov. 11, ASML hosted an investor day during which management outlined its outlook for the wide-moat lithography leader. The firm focused on its strategies and investments to enable advances in semiconductor scaling via more advanced extreme ultraviolet lithography; it also provided an updated financial model. Management now expects 2025 revenue to be EUR 30 billion-EUR 40 billion, up from its EUR 24 billion-EUR 30 billion outlook presented at last year’s investor day. This revenue forecast is consistent with our internal model, and thus we are maintaining our $700/EUR 700 fair value estimate. While the shares are up more than 40% over the past month, we still believe they look undervalued at current levels, as we expect demand for ASML’s EUV tools will prove more resilient to a downturn in the semiconductor market in 2023.

ASML is the predominant supplier of photolithography equipment for semiconductor manufacturers. We expect it to materially benefit from the proliferation of extreme ultraviolet, or EUV, lithography and we believe the uncertainty concerning the long-term extent of EUV insertion has sufficiently diminished to justify a wide moat rating.

ASML reported third-quarter results better than our expectations and management's guidance. The firm remains hamstrung by supply chain challenges, though these have been improving more recently. Thanks to higher EUV and services revenue, management now expects 2022 revenue to be up 13% (versus 10% previously). Concerning the latest U.S. export control restrictions to China, management does not expect a material impact to ASML's 2023 shipment plan, though it concedes there could be an indirect impact due to the inability of peers to ship their tools. Specifically, about 5% of ASML's backlog of EUR 38 billion could be at risk, which is consistent with our thoughts on ASML's risk. Should ASML be unable to ship to certain Chinese customers, we expect demand from other customers to make up for any lost sales.

ASML is the leader in photolithography equipment for semiconductor manufacturers. We expect it to materially benefit from the proliferation of extreme ultraviolet, or EUV, lithography and we believe the uncertainty concerning the long-term extent of EUV insertion has sufficiently diminished to justify a wide moat rating.

Based on recent strengthening of the U.S. dollar relative to the euro (with both currencies effectively at parity), we are lowering our USD-denominated fair value estimate for wide-moat ASML to $696 per share from $761 per share. We are maintaining our EUR-denominated fair value estimate of EUR 696 per share.

ASML reported second-quarter results above our expectations and management’s guidance. The firm remains heavily impacted by supply chain challenges, though ASML has been utilizing fast shipments (systems that ship to a customer as soon as possible but with delayed revenue recognition) to help mitigate the chip shortage and meet customer needs. Management now expects EUR 2.8 billion in sales to be deferred to next year (up from EUR 1 billion last quarter). Consequently, 2022 revenue growth is expected to be 10% (down from 20% previously). We note the total shipment volume for ASML in 2022 is relatively unchanged and expect most of the deferred revenue to be recognized in 2023.

ASML is the leader in photolithography equipment for semiconductor manufacturers. We expect it to materially benefit from the proliferation of extreme ultraviolet, or EUV, lithography and we believe the uncertainty concerning the long-term extent of EUV insertion has sufficiently diminished to justify a wide moat rating.

Amidst recent market volatility, several semiconductor stocks have fallen considerably and now look attractive relative to our fair value estimates. Despite the ongoing chip shortage, we think investors are rightly concerned about slowing demand in large end markets such as PCs and smartphones. We expect many chip firms to continue recording strong results in 2022, but we anticipate a slowdown in 2023 as demand ebbs and new supply comes online. Consequently, we are most positive on undervalued wide-moat names that we think have the most robust exposure to secular trends such as artificial intelligence, cloud computing, automotive chip content, 5G, and other promising growth vectors.