ASML Holding (ASML 0.44%) has a big backlog, high demand, yet it's facing persisting supply chain issues. Despite these challenges, it could make for a great stock pick over the long-term. In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on May 25, Motley Fool contributor Toby Bordelon discusses some of the challenges in-depth that ASML Holding is facing today but makes a case for why the future of its stock looks promising.
Toby Bordelon: ASML Holding. Some people out there, our viewers maybe ask themselves, what is this company? What do they do? They are a manufacturing company. In short, they make the machines that semiconductor manufacturers use to make their semiconductor chips. They are a manufacturer for manufacturers, if you want to think about it that way. Really solid company. They are one of the leaders in chip manufacturing equipment. There is relatively new manufacturing methodology out there. Extreme ultraviolet lithography to get those really, really small chips there. They are the only manufacturer of EUV equipment out there right now that could change in the future, but right now they're the only ones out there. Generation behind that is DUV stuff, which a bunch of people make. Some of their customers, Taiwan Semiconductor (TSM +0.42%), Samsung (OTC:SSNLF), Intel (INTC +1.15%), the big chipmakers that you know, are all companies that go to ASML for their equipment. Now, I want to look at just one aspect of the earnings report they just released to give you a sense of what's going on. I hope this explains and shows you why you need to put quarterly reports into context of the economy and not just think in isolation and short-term. Let's take a look at this. This is their income statement for the quarter ended just last month, April 4. You look at this, the most recent quarter is on the right, the year-ago quarter on the left there. You look at this and you say, wait a minute, sales are declining. Is that a problem? I thought there was mass demand for semiconductor chips, why are sales going down? What's the problem? You might think there is a problem. In the short-term, I think, maybe there is, but long-term it's not really that bad. Because you look at the rest of the financial statements, specifically the income statement, what's going on there? You're going to notice something. You're going to notice this line item called contract liabilities. This is a year-ago for the full-year for 2021 versus 2020. Look there, you see it yourself, contract liabilities went up a lot. What is going on there? Well, contract liabilities essentially captures both deferred revenue, cash they've received, they haven't delivered the equipment yet or orders that are firm and they haven't delivered that yet and payment they received, both of those captured this idea of contract liabilities. You see that big increase and they break this down for us. We see a pretty big increase, especially this last one here, remaining performance obligation. They've got the money or they have non-conditional rights until you receive the money, a firm order. A lot of a big increase there. You take this altogether and what's really going on is supply chain issues. We see the company has lower sales in this quarter, but increasing backlog. You think about what's going on in the semiconductor industry. High-demand, can't make chips fast enough, can't get them where they want to go. This just shows us that this is not a problem that's unique to a specific part of the industry. The whole industry is struggling right now getting things where they need to be. The chipmakers can't make more insurance because they can't get the equipment to make them fast enough. All of this is wrapped into one. But the situation, you've got declining sales with an increase in order backlog that gives you hope for the future. This company, ASML, is guiding for $5 billion in revenue for next quarter. Higher than Q1, things look like they might be getting better. They're going to start making some of those deliveries. I think the bottom line here is, maybe you're concerned a little bit in the short-term about declining sales, but the backlog is big, the demand is huge. Looking out medium-term, long-term, you don't really have any concerns about where they are, I think.
