ASML's (ASML 2.04%) stock price dropped 4% on Oct. 18 after the Dutch semiconductor equipment maker posted its third-quarter earnings report. Its revenue rose 15% year over year to 6.67 billion euros ($7.03 billion), its gross margin expanded by 10 basis points to 51.9%, and its EPS grew 12% to 4.81 euros ($5.07).
For the full year, ASML expects its revenue to rise nearly 30% with a "slight improvement" in its gross margin. Analysts expect its revenue and EPS to rise 28% and 38%, respectively, which would represent an acceleration from its 14% revenue growth and 2% EPS decline in 2022. Those near-term forecasts seem bright, but they were overshadowed by a grim outlook for flat sales growth in 2024. Let's see how that slowdown might impact ASML's stock price over the next 12 months.
Image source: Getty Images.
Understanding ASML's challenges
ASML is the world's largest manufacturer of lithography systems for optically etching circuit patterns onto silicon wafers. It's also the only producer of top-tier extreme ultraviolet (EUV) lithography systems for manufacturing the world's smallest chips. The three most advanced chip foundries -- Taiwan Semiconductor Manufacturing (TSM 1.26%), Samsung, and Intel (INTC -9.20%) -- all rely on ASML's EUV systems to produce their latest chips.
ASML doesn't face any meaningful competitors yet, but it isn't invulnerable to macroeconomic and regulatory headwinds. On the macro front, it was affected by the post-pandemic slowdown in PC sales, the end of the 5G upgrade cycle in smartphones, and slower chip upgrades across other sectors as interest rates rose. On the regulatory front, it faces tighter export curbs of its systems to Chinese chipmakers. It's been barred from shipping EUV systems to China since 2019, but it will face even tighter restrictions on sales of its lower-end deep ultraviolet (DUV) systems to Chinese chipmakers in 2024.
Here comes the "transition year"
If we look back at ASML's growth over the past five years, we'll see that its growth generally ebbs and flows with that of the broader semiconductor market.
|
Metric |
2018 |
2019 |
2020 |
2021 |
2022 |
2023* |
|---|---|---|---|---|---|---|
|
Revenue Growth (YOY) |
22% |
8% |
18% |
33% |
14% |
28% |
|
Gross Margin |
46% |
44.7% |
48.6% |
52.7% |
50.5% |
50.5%+ |
|
EPS Growth (YOY) |
27% |
1% |
38% |
69% |
(2%) |
38% |
Data source: ASML. YOY = Year over year. *Company and analyst estimates.
2019 was a tough year due to sluggish smartphone sales and a supply glut in memory chips, and it grappled with supply chain headwinds throughout the pandemic in 2020. Its growth accelerated again in 2021 but cooled off in 2022 as the aforementioned macro and regulatory headwinds disrupted the semiconductor market.
ASML's accelerating growth in 2023 is encouraging and suggests the semiconductor market is bottoming out. But in its third-quarter press release, ASML warned that its "customers continue to be uncertain about the shape of the demand recovery," and it's expecting 2024 to be a "transition year" with "similar" revenue as 2023.
Why investors shouldn't overreact to that slowdown
That warning for flat revenue growth missed analysts' expectations for 4% revenue growth. It also might rattle investors' confidence in ASML's long-term plan to grow its annual revenue at a CAGR of 10%-14% from 2022 to 2030. But the math still supports that outlook: even if ASML's revenue stays flat at 27 billion euros ($28.4 billion) in 2024, it could grow its revenue at a CAGR of 8%-14% to reach its target range of 44 billion euros ($46 billion) to 60 billion euros ($63 billion) in revenue in 2030.
ASML also said it anticipates "significant growth" in 2025 as the semiconductor market recovers and it rolls out its newest high-NA EUV systems for producing sub-2nm chips. For reference, ASML's EUV systems are currently used to mass produce chips down to the 3nm node. TSMC and Samsung plan to roll out their first 2nm chips in 2025.
Analysts expect ASML to generate 33.8 billion euros ($35.6 billion) in revenue in 2025, which would represent about 25% growth in 2023 and 2024. The company notably doesn't expect the latest export curbs against China to impact its long-term growth targets for 2025 through 2030. So if investors look past a lackluster 2024, ASML's outlook still looks promising.
Where will ASML's stock be in a year?
ASML stock trades at about 27 times next year's earnings. That valuation is reasonable, but it doesn't make it a screaming bargain. ASML's upside potential could be limited over the next 12 months as it slogs through its "transition" year of flattish revenue growth. But for 2025 and beyond, I believe ASML's stock could head higher as the semiconductor sector finally recovers.
