What happened
Shares of Dutch semiconductor equipment giant ASML Holding (ASML -1.71%) rose as much as 8.2% today, before retreating to a 6% gain as of 2:40 p.m. ET.
This special company, which has a monopoly on extreme ultraviolet (EUV) technology, reported third-quarter earnings last night, in which revenue and earnings came in ahead of expectations. Management also gave solid guidance for the quarter ahead.
The beat came against the backdrop of a steep fall in the stock price, as semiconductor equipment stocks had been harmed by fears over a chip downturn next year, as well as recently announced limitations on sales to China. However, ASML's solid report seemed to allay those fears... at least for a day.
So what
In the third quarter, ASML reported 5.8 billion euros in sales, up 10.2% over the past year, while earnings per share came in at 4.39 euros. Both figures beat expectations. The company also reported a sequential gain in net bookings, which reached 8.9 billion euros. Management also projected revenue between 6.1 billion and 6.8 billion euros in the current quarter, marking strong sequential growth.
It was good to see the strong growth progression for a number of reasons. First, ASML has had some severe supply constraints this year, otherwise its revenue growth would be higher. Those constraints had also led to a lower gross margin, but last quarter's gross margin came in at a solid 51.8%. While lower than last year, it was above prior guidance.
Second, many had wondered if recently announced cuts in capital expenditure plans among certain memory and chip manufacturers would affect fourth-quarter sales; however, ASML's demand has outstripped supply by so much this year that doesn't seem to be the case. In a company video interview, CFO Roger Dassen said that while some customers have pushed back when they would like to receive their machines, the "lion's share" of customers still want their machines as fast as possible. So, softening demand isn't exceeding the current backlog.
This is likely due to the fact that ASML's EUV machines are really geared for the most leading-edge logic chips, and chipmakers are still competing on the leading edge, transitioning to the newest node every year, no matter the market conditions. In addition, there is new fierce competition going on among the world's leading foundries, which are each looking to boost their leading-edge bona fides. On top of that, efforts to reshore semiconductor production through subsidies like the CHIPS Act in the U.S. are boosting demand for new leading-edge fabs in countries that currently find themselves at the mercy of East Asian producers. All of these factors are outweighing some near-term weakness in consumer electronics.
In addition, ASML noted there would be limited impact from the new U.S. curbs on sales of machines to China for leading-edge production. ASML already doesn't sell any EUV machines to China, and Dassen noted that since ASML's deep ultraviolet (DUV) machines contain nearly all European technology, they weren't subject to the new restrictions. However, he did note there may be some indirect impact if new Chinese fabs are delayed due to a lack of other non-ASML U.S. tools, and that ASML was still evaluating the new regulations.
Now what
The semiconductor production complex is undergoing a massive disruption as Western democracies are cutting off China while subsidizing new production on their own shores. In addition, while the long-term trends of digitization, artificial intelligence, and 5G are all intact, there is currently a downturn in consumer electronics amid high inflation.
These uncertainties are why these high-quality, wide-moat stocks like ASML are down so much; however, it could be a massive opportunity for long-term investors. After all, if these companies' technologies are so important and irreplaceable that they have to be banned from certain countries, they must have a lot going for them!
As long as demand for semiconductors continues to grow over the long term, they will get produced somewhere. Meanwhile, ASML is trading at the most reasonable valuation it has in years. It looks like a bargain following this solid earnings report.
