ASML Holding (ASML 2.04%) is a bellwether of the semiconductor industry because the Dutch company's manufacturing equipment is deployed by leading foundries and chipmakers across the globe to make the semiconductors that are then used in multiple industries.
It is estimated that Taiwan Semiconductor Manufacturing (popularly known as TSMC), Intel, and Samsung are its three largest customers, accounting for over 80% of its top line. So when ASML said that its "customers continue to be uncertain about the shape of the demand recovery in the industry," it was not surprising to see its semiconductor industry peers, including Nvidia (NVDA 6.18%), head lower on the news.
What happened?
ASML released third-quarter 2023 results on Oct. 18. Though the company reiterated its 2023 revenue-growth forecast of 30%, it expects 2024 revenue to remain flat. Another alarming reading from the report was the 71% year-over-year decline in net bookings to 2.6 billion euros ($2.76 billion). The company received $9.45 billion in net bookings in the same period last year.
This is an important metric because it refers to firm sales orders received by ASML in the form of written authorizations. So its customers have reduced the demand for its advanced chipmaking equipment -- which plays a crucial role in serving fast-growing end markets such as artificial intelligence (AI) -- by a massive margin. In simpler words, the likes of TSMC and Samsung, which manufacture chips for Nvidia, have reduced their demand for semiconductor manufacturing equipment.
Does this point toward a slowdown in the demand for Nvidia's AI chips, which have played a central role in the company's eye-popping growth this year and sent its shares up by 205%? Let's find out.
Are the wheels going to come off Nvidia stock?
ASML management said on the latest earnings conference call that it did not receive any bookings for its high-NA scanners last quarter. These machines are supposed to help chipmakers and foundries make 2-nanometer (nm) chips. Each machine reportedly costs between $300 million to $400 million, and the company has received multiple orders for these machines with deliveries expected to begin in 2025.
This also means that these advanced machines aren't playing a role in manufacturing Nvidia's AI chips because ASML's customers are yet to receive them. Nvidia's flagship data-center graphics processing unit (GPU) -- the H100 -- is reportedly manufactured with a 5nm process. This $40,000 chip reportedly has a waiting period of at least six months, and Nvidia's foundry partner is working to scale up its production of AI chips by a big margin.
Nvidia's output of the H100 processors could jump by three to four times in 2024 from this year's estimated output of 500,000 units, according to the British newspaper the Financial Times. Nvidia's manufacturing partner TSMC is set to substantially expand its capacity for manufacturing advanced chips in 2024, so it won't be surprising to see an increase in the sales of the H100 next year.
These H100 chips are manufactured using ASML's extreme ultraviolet lithography (EUV) process, which is deployed for making chips on 7nm, 5nm, and 3nm nodes.
ASML got bookings worth $530 million for these EUV machines last quarter. Each machine costs around $200 million, which means that ASML received orders for just two of these machines last quarter.
However, this is not a red flag for Nvidia. ASML shipped 31 EUV systems in 2020, followed by 42 in 2021, and 54 in 2022. This year, the company is expected to ship 60 EUV systems. Given that each EUV system reportedly takes between one to two years to deliver to customers, it won't be surprising to see it ship a healthy number of EUV systems in 2024 as well.
ASML was sitting on an order backlog worth $37.1 billion at the end of the third quarter. Its guidance indicates that it could finish 2023 with revenue of $28.6 billion, of which it has already delivered $21.5 billion in the first nine months of the year. So ASML has a solid enough backlog for 2024.
With 45% of the company's revenue coming from sales of EUV systems, there is a good chance that it will continue to ship machines used for manufacturing AI chips in good numbers next year.
All this indicates that ASML's guidance shouldn't cause concern for Nvidia investors, especially considering that the demand for AI chips is set to expand in 2024. Market research firm TrendForce estimates that AI server shipments could increase by 38% in 2023 and 2024. Given that Nvidia controls 85% of AI workloads in servers, it is in a good position to capitalize on this impressive growth.
Morningstar estimates that Nvidia's data center revenue could increase from an estimated $41 billion in the ongoing fiscal 2024 to $100 billion in fiscal 2028 despite China-related restrictions. That's why investors who hold its shares would do well to continue holding the chipmaker as the stock's rally is unlikely to cool down anytime soon.
