ASML stock struggles as near-term inventory challenges compete with potential 2024 rebound

By Wallace Witkowski

Chip-equipment suppliers ASML's results and outlook topped Wall Street's expectations, but shares still decline

ASML Holding NV's U.S. shares declined Wednesday after the chip-equipment supplier said it saw "mixed" signals from end markets as the semiconductor industry continues to deal with inventory issues, but analysts expect a big rebound by 2024.

ASML (ASML.AE) ADRs fell as much as 3.8% to an intraday low of $616.88 in the regular session, while the S&P 500 index and the Nasdaq Composite Index were both flat, and the PHLX Semiconductor Index was down 1%. ASML ADRs are down 6% for the week, but up about 15% year to date, while the SOX index is down 0.6% for the week, and up more than 20% year to date.

The Netherlands-based company that manufactures equipment for the semiconductor industry reported first-quarter net income of 1.96 billion euros, or 4.96 euros a share, compared with 695.3 million euros, or 1.73 euros a share, in the year-ago period.

Revenue rose to 6.75 billion euros from 3.53 billion euros in the year-ago quarter. ASML makes the highly technical equipment that chip makers and fabs use to turn silicon wafers into semiconductors.

Converting to dollars , earnings came in at $5.44 a share on revenue of $7.4 billion. Analysts surveyed by FactSet had forecast $4.58 a share on revenue of $6.92 billion.

"We continue to see mixed signals on demand from the different end-market segments as the industry works to bring inventory to more healthy levels," said ASML Chief Executive Peter Wennick in a statement. "Some major customers are making further adjustments to demand timing while we also see other customers absorbing this demand change."

Wennick forecast second-quarter revenue between 6.5 billion and 7 billion euros, or $7.12 billion to $7.67 billion, with a gross margin between 50% and 51%. Analysts had forecast revenue of $7.07 billion. Shares of rival Lam Research Corp. (LRCX) were down less than 1% ahead of its earnings after Wednesday's close.

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While ASML reported a "solid" quarter and outlook that benefited from "fast shipments, strong backlog, and a robust foundry/logic demand environment," TD Cowen analyst Krish Sankar, who has an outperform rating on the stock, said that "capacity constraints, inflationary pressures, and a slowing order book remain [near-term] challenges," calling the company's ability to grow revenue and earnings in the current macro environment "impressive."

ASML counts Intel Corp. (INTC), Taiwan Semiconductor Manufacturing Co. (2330.TW), and Wuxi Chipown Micro-Electronics Ltd. as its largest customers, and Carl Zeiss AG , and Kendrion NV as among its major suppliers, according to FactSet data.

Evercore ISI analyst C.J. Muse, who has a buy rating said that "despite the downtick in orders, we continue to believe ASML's extended lead times will enable the company to best weather the current slowing demand environment for front-end Semi Equipment."

While investors are concerned about TSMC cutting capex, Muse believes infrastructure spending is "mostly unchanged" and that Samsung will fill in for orders TSMC will make in 2024.

Summit Insights Group analyst Kinngai Chan, who has a buy rating, remains "confident that ASML is well-positioned to outperform in the medium to longer term as we expect growth to be supported by the strategic nature of lithography spending."

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"Our industry checks, however, do indicate a higher risk profile for wafer fab equipment spending due to the weaker-than-expected end-demand dynamics in 2023 the risk of further weakening orders into [the second half of 2023] as the end demand for semiconductors recalibrates to the new economic realities," Chan said, with the analyst expecting orders for lithography tools "to reaccelerate by 2024," as memory-chip makers and others need to make smaller transistors.

Of the 35 analysts who cover ASML, 29 have buy-grade ratings, five have hold ratings, and one has a sell rating, along with a price target of $782, according to FactSet data.

-Wallace Witkowski

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04-20-23 0810ET

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