Shares of leading semiconductor manufacturing equipment company ASML Holding (ASML 2.04%) have been on an absolute tear since last autumn. The stock is up by nearly 80% from its October 2022 low despite numerous headwinds, including a nasty downturn for the chip industry and export curbs on advanced hardware and technology to China.
ASML has been rallying through it all, and though artificial intelligence (AI) is the theme of the moment on Wall Street right now, the company is indicating the next bull market has arrived. Here's what investors need to know.
ASML is critical to the global economy, and it shows
ASML occupies a special place in the global supply chain. The Dutch business is the sole producer of extreme ultraviolet (EUV) lithography equipment, the only technology capable of manufacturing the most advanced chips for smartphones, data centers, AI, and other high-performance computing applications.
Thanks to its specialized machinery and the world's insatiable hunger for more powerful chips, ASML has been able to put up impressive financial numbers, even in a tough time for the chip sector broadly. Its revenue rose 27% year over year to 6.9 billion euros in the second quarter, and net income was up 38% to 1.94 billion euros.
The chip recovery is still slow going
Even more impressive was that ASML boosted its guidance for the year. Interestingly, its additional expected growth is due to rising demand for more mature chips, not the most advanced ones. In fact, ASML said some of its manufacturing partners are pushing out expectations for a full semiconductor industry rebound to later this year or even early 2024, owing to sluggish demand for PCs and smartphones.
But that's being more than offset by stellar demand for automotive and industrial chips, which are manufactured using deep ultraviolet (DUV) lithography equipment. ASML doesn't have a monopoly on DUV like it does EUV, but it nonetheless makes some of the best DUV machines around.
Management said sales of its most expensive DUV machines (called immersion DUV) are expected to be 700 million euro higher this year than originally anticipated. As a result, total revenue for 2023 is now expected to rise by about 30%, up from the previous guidance for about 25% growth.
Are tighter restrictions on China sales coming?
Now about those restrictions on sales to China. ASML CEO Peter Wennink had this to say on the Q2 earnings call:
As a reminder, sales of ASML's EUV tools have already been restricted, and the business in China is predominantly focused on mature and mid-critical nodes. The new Dutch export regulations will come into effect on Sept. 1, 2023. ... Therefore, based on everything we have been made aware of as of today, we do not expect the Dutch and potential additional U.S. measures to have a material impact on our financial outlook for 2023, nor on our longer-term scenarios as communicated during our Investor Day in November last year.
This is deeply important. As far as it appears right now, ASML believes it has already fully lapped the disruptions from the ongoing trade war between the U.S. and China, and new restrictions won't affect its growth outlook.
2024 and beyond
2023 is on track to be an exceptional year for ASML, but many of its customers are trying to manage their cash flows as the chip industry heads for the bottom of this cycle. Because of this dynamic, ASML's top customers (Taiwan Semiconductor Manufacturing, Samsung, and Intel) aren't placing purchase orders with it for the second half of 2024 -- at least, not yet.
Management thinks those customers will make those purchase orders eventually to support the big shift in chip manufacturing technology that is poised to play out in 2025. Insight into how 2024 will play out for ASML is limited at this juncture. Bear that in mind when considering the stock's current valuation of 34 times earnings. Its forward price-to-earnings ratio based on early 2025 earnings expectations from Wall Street, though, is roughly 23.
ASML has a tremendous growth runway over the next five years. Potential new restrictions on China notwithstanding, the stock looks like a solid long-term buy to me after the company's second-quarter update.
