After an extensive investor update in November 2022, ASML Holding (ASML 2.41%) turned in an as-expected fourth-quarter 2022 earnings update. More importantly, the essential semiconductor manufacturing industry equipment supplier provided some initial guidance on 2023 that jives with what other chip companies have been reporting: There will be a dip in the first half of the year, with a resumption of growth thereafter.
It may not be groundbreaking financial stuff, but ASML's high-tech equipment looks good with this outlook for the coming year. Long-term profitable expansion is on track, and shares could be a buy here for the right type of investor.
NASDAQ: ASML
Key Data Points
A record year, and another record is expected for 2023
ASML reported a nice finish to a bumpy 2022. Q4 revenue was up 29% year over year to 6.43 billion euros ($7.01 billion using exchange rates from Jan. 25). Full-year 2022 revenue was 21.2 billion euros ($23.1 billion), up 14% from 2021.
Operating profit margin in Q4 was a very healthy 33% of revenue as ASML continues to rally from supply chain disruptions and new trade restrictions on exports to China imposed on it by the Netherlands (its country of domicile) and the U.S. (through which the lifeblood of the global semiconductor industry flows).
Data by YCharts.
If you're keeping track of ASML's EUV (extreme ultraviolet) lithography equipment, the advanced machines that China has now been cut off from, ASML did OK in that department. It realized 7 billion euros of revenue from 40 of those systems in 2022 (it shipped an additional 14 it hasn't realized revenue on yet) -- meaning the average selling price for an EUV machine was 175 million euros last year (nearly $191 million). ASML is currently the only company that makes EUV machines, critical machinery needed to make high-performance semiconductor chips used in AI and in smartphones like Apple's iPhone.
But what of the 2023 outlook? ASML reiterated guidance that has already been provided by ASML customers like Taiwan Semiconductor Manufacturing. In short, the semiconductor industry is in a slump that will last through the first half of 2023, but it should then resume its up-and-to-the-right growth thereafter.
Specifically, ASML said its Q1 2023 revenue will be between 6.1 billion and 6.5 billion euros ($6.7 billion to $7.1 billion), down sequentially from the quarter just reported but a massive increase over the 3.5 billion euros it brought in in Q1 2022. Sequential growth should resume later in 2023 as demand for chips -- in particular from consumer electronics -- begins to make a comeback.
ASML would like us all to just get along
That being said, ASML's top team was cautious on 2023. There's still a difficult economic outlook that could strike down upward progress, like if a severe recession hits. There's also geopolitical risk. The U.S. has reportedly expressed interest in expanding its China export bans beyond EUV equipment to older generation DUV (deep ultraviolet) lithography equipment, though ASML has pushed back against this posturing. China, even without the ability to buy the most expensive EUV equipment, still accounted for 14% of system sales last year.
The rationale is that even after the global pandemic and ensuing supply chain risks, the semiconductor industry is highly reliant on global collaboration. Even as various governments around the world (led by the U.S.) plow funding into bringing chipmaking back to their shores, a worldwide distributed chip supply chain isn't going away. ASML would really like everyone to start getting along. If governments don't, it could be a further negative disruptive force for the company.
Is ASML stock a buy?
While there were few surprises in this quarterly update, the main takeaway is that ASML would like shareholders to know that it remains on track to reach its long-term goals. It entered 2023 with a massive backlog of 40.4 billion euros in systems and services revenue. Demand still exceeds ASML's capacity to fulfill it. That's a nice problem to have. In other words, it will take more than a temporary dip in chip demand through the first half of 2023 to get chip manufacturers to slam the brakes on ordering ASML's equipment.
In November 2022, management said it expects annual revenue to be in a range of 30 billion to 40 billion euros by 2025, and between 44 billion and 60 billion euros by 2030. Along the way, ASML thinks its gross profit margins could jump to as high as 60% by 2030, compared to 2022 gross profit margins of 50.5%. If it pulls that off, that would be quite the run higher for sales and profit margins.
At about 44 times trailing 12-month earnings after the Q4 report, ASML certainly isn't the steal of a deal it was a few months ago. Though a big rebound in profits is likely as 2023 wears on, an elevated current valuation could create some bumpiness in the stock price. However, if you're still eyeing the potential over the course of the next five to 10 years, ASML could still have plenty of growth left in the tank.
