The near-term outlook doesn't look so good for semiconductors. Look no further than the recent tepid guidance from memory producer Micron (MU 2.73%) and hard disk storage provider Seagate Technology (STX 0.36%) as evidence.

First, there is a hangover from the pandemic-era boom in PCs and smartphones, with consumers now spending money on travel and experiences. High gas, rent, and food inflation are also conspiring to take away the consumer's purchasing power, and China's lockdowns have depressed demand even further.

With the Federal Reserve raising rates and several measures of economic activity going into contraction, it's no surprise companies may be cutting back on investments and inventory when they can. That has the potential to even hurt the stronger data center and industrial markets -- though we haven't seen those slow just yet.

Yet in contrast to other chip companies, leading semiconductor equipment company ASML (ASML 1.02%) isn't seeing a slowdown in its business -- quite the opposite. Here's why ASML, and perhaps other equipment stocks, may be able to defy the semi slump.

ASML's technology is less cyclical than other semis

While Micron and Seagate produce different kinds of storage media, which are somewhat commodity-like, ASML makes key machines that help produce all kinds of chips. Furthermore, ASML is the only company to make extreme ultraviolet lithography (EUV) machines, a proprietary technology needed in order to produce the most advanced leading-edge logic and DRAM memory nodes.

But if the need for chips is slowing down and we are headed to recession, wouldn't there be decreasing orders for ASML machines?

If a recession is very deep and painful enough, it's possible. But ongoing digital transformation is a long-term structural growth trend, with more semiconductor content per server, car, phone and computer with each passing year.

Thus, even if phones or PC units are down for the year, those vendors are still going to want the most powerful and energy-efficient processors in their new devices. Therefore, there will still most likely be perpetual investment in leading-edge nodes, and therefore, EUV. 

"Don't sell our machines to someone else"

On its recent earnings call, ASML CEO Peter Wennink pointed out that there are eight new leading-edge fabs currently under construction before the end of next year. All of those fabs obviously need lots of EUV tools, since they will be for leading-edge production, as well as ASML's DUV tools and others. Since the production of leading-edge nodes is growing more capital and time-intensive, these are more long-term, strategic investments. Wennink elaborated:

So any short-term shocks in the demand cycle -- and you have to compare with the long-term view that our customers have on the whole digital transformation, and that's why they are building fabs. 8 EUV fabs till the end of next year need tools, and they need immersion and they need dry. And so this is why we have a big backlog.

While ASML's revenue came in at only 5.4 billion euros last quarter, the company is supply constrained. ASML took in a higher 8.5 billion euros in orders, and its backlog increased to 33 billion euros, 85% of which is in EUV tools. CFO Roger Dassen elaborated that the backlog of EUV machine orders is "well over 100," but ASML only has the capacity to ship 55 this year, which is half over, and only 60 machines next year.

An ASML EUV machines.

ASML's machines remain in high demand even as the semi sector softens. Image source: ASML.

That still leaves EUV demand outstripping ASML's supply. So even if a recession were to take orders down or delay a few shipments, ASML shouldn't see its machine sales interrupted.

Even with regards to memory customers, who have all said they could potentially scale back investments in 2023 amid the memory slowdown, Wennink said he is hearing different things when these customers talk to ASML:

But they hasten to pick up the phone and say one thing, "I don't think you can give our machines to other people because of this. We want those machines... We have these strategic investment projects, and we need those machines."

Can equipment stocks grow through a down-cycle?

While some consumer-facing semiconductor companies could face a slowdown or decline next year, it's also possible semicap equipment sales may hold up better-than-expected. That's especially true for technology leaders that enable the most advanced logic and memory nodes. Given intensifying competition among leading foundries, as well as countries that all want some key capacity on their shores, machine sales are unlikely to be as affected as some current chip sales, unless we have a downturn akin to the Great Financial Crisis.

Many semiconductor stocks tend to trade in tandem, and most are down significantly this year; however, picking out the companies with more secular growth drivers versus more cyclical vulnerabilities, or those equipment companies that enable long-term digital transformation, could be a big opportunity for outperformance as we go through this uncertain period.