ASML Holding (ASML -1.03%) posted its first-quarter earnings report on April 20. The Dutch semiconductor equipment maker's revenue fell 19% year over year to 3.53 billion euros ($3.83 billion), but it still beat analysts' estimates by 20 million euros. Its net income fell 48% to 695 million euros ($753 million), or 1.73 euros ($1.87) per share, but it also cleared expectations by 0.05 euros.
ASML faced a very difficult comparison to the prior-year quarter, when its revenue and EPS grew 79% and 244%, respectively, against the pandemic's initial impact in early 2020. But if we smooth out those messy year-over-year comparisons, ASML's future still looks bright. Let's discuss the three bright green flags that could bring back the bulls this year.
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1. The bearish concerns about ASML were overblown
The bears expected ASML to struggle with three main challenges in the first quarter. First, a fire at its Berlin factory in early January disrupted its production of older deep ultraviolet (DUV) systems and damaged a module that was used in its newer extreme ultraviolet (EUV) systems.
Second, the Russian-Ukrainian war disrupted the global supply of neon gas, which was used in the gas-phase lasers of its DUV systems. Lastly, higher-than-expected 3nm yields at its top customer Taiwan Semiconductor Manufacturing (TSM -0.34%), or TSMC, suggested it might buy fewer EUV systems from ASML to hit its near-term production targets.
But despite all those challenges, ASML's revenue growth in the first quarter still hit the high end of its own guidance. It also expects its revenue to grow 27%-32% year over year in the second quarter, and it maintained its prior guidance for "around 20%" revenue growth for the full year. That's a bit higher than analysts' expectations for 19% growth.
That stable top-line forecast indicates the bearish concerns were overblown. Investors should also recall that ASML expects its annual revenue to hit 24 billion to 30 billion euros ($32.6 billion) in revenue by 2025, which implies its revenue will continue to grow at a compound annual growth rate (CAGR) between 6.6% and 12.7% for the next four years.
2. Stable gross margins
ASML's gross margins rose from 44.9% in 2017 to 52.7% in 2021. That consistent expansion was driven by its unmatched pricing power.
ASML is the world's only manufacturer of EUV systems, which cost about $150 million each and require multiple planes to ship. EUV systems are used to etch circuit patterns onto wafers for the world's smallest and densest chips, and the world's top chip foundries -- TSMC, Samsung, and Intel (INTC 0.64%) -- are all lined up to obtain more EUV systems.
ASML's gross margin fell 520 basis points year-over-year to 49% in the first quarter of 2022. That decline was mainly caused by supply chain constraints and "fast shipments" -- which temporarily forego certain final tests in the installation process -- as its top foundry customers race to buy more systems to address the ongoing chip shortage. Those priority shipments have temporarily disrupted and delayed some of its other shipments.
However, ASML expects that pressure to ease in the second half of the year. It expects its gross margin to rise sequentially to 49%-50% in the second quarter of 2022, and potentially rise to about 53% for the full year.
It also maintained its long-term goal of achieving a gross margin of 54%-56% by 2025, which it set alongside its revenue targets last September. Analysts expect its earnings per share to grow by 13%.
3. A reasonable valuation and a clear roadmap
Based on analysts' expectations, ASML's stock trades at 35 times forward earnings and 10 times this year's sales. Those valuations aren't cheap, but they're reasonable for a semiconductor equipment maker that has monopolized a key piece of technology in the chipmaking supply chain.
ASML still has plenty of irons in the fire. Its current-gen EUV systems will help chipmakers produce chips down to the 3nm node, but its next-gen "high-NA" systems will help them manufacture even smaller and denser chips.
Over the next few years, ASML expects its higher-margin EUV systems -- which accounted for 36% of its bookings in the first quarter -- to drive most of its earnings growth. That transition will generate even more cash for the development of newer machines to succeed its high-NA EUV systems.
I'm still optimistic about ASML's future
ASML might seem like a cyclical stock, but it's still firing on all cylinders. Its dominance of the high-end photolithography system market makes it a linchpin of the semiconductor sector, and the world's insatiable appetite for new chips should drive this stock even higher over the next few years.
