ASML Earnings: We Maintain Valuation as Pockets of Strength Help To Offset Cyclical Memory Weakness

We maintain our $750 per share fair value estimate for ASML 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.

Second-quarter sales rose 27% year over year and 2% sequentially to EUR 6.9 billion, near the top end of management’s guidance. Sales to logic customers drove results, as memory continues to see depressed supply while inventory at customers corrects. ASML’s deep ultraviolet, or DUV, machines are seeing tremendous growth, driven in part by Chinese customers that are maintaining supply capacity. Gross margin of 51.3% was a good level for ASML, and above guidance. Management credited a higher mix of immersion lithography tools in the quarter for the strong gross margin.

ASML is guiding to roughly flat sequential sales in the third quarter, with a range of EUR 6.5 billion-EUR 7.0 billion. Third-quarter gross margin is guided to 50%, a sequential dip that management expects to come from a higher DUV mix. Management raised its full-year growth guidance to 30%, from 25%. It now expects 50% growth for DUV tools (up from 30% previously), more than offsetting weaker EUV growth of 25% (down from 40% previously). Customers are pushing out upgrades, which is delaying EUV orders and depressing services revenue, but strength at lagging edge nodes and out of China is driving the impressive DUV strength.