Why ASML Holdings Rallied 17.1% in January

Shares of key semiconductor equipment supplier ASML Holdings (ASML 2.04%) rallied 17.1% in January, according to data from S&P Global Market Intelligence.

ASML reported fourth-quarter earnings on Jan. 24, with better-than-expected results. Management had been fairly conservative with its 2024 outlook on the prior quarter's call, saying it would only see relatively flat growth to 2023; revenue jumped 30.2% over 2022.

However, ASML's net bookings, which takes in the total amount of orders received in the quarter that may be shipped in the future, jumped 353% quarter over quarter, reversing three quarters of declines and indicating 2024 may be a better year than management is letting on.

End markets are bottoming as AI demand takes off

ASML has had a different cadence to its recent cycle compared with other semicap equipment companies. ASML dominates the lithography business, and actually has a monopoly on extreme ultraviolet lithography (EUV), which is needed to make all of today's leading-edge chips.

Because of the critical nature and difficulty of manufacturing its massive, expensive machines, ASML was especially supply constrained during the height of the pandemic and its aftermath. Demand for ASML's DUV machines for trailing-edge nodes for auto and industrial remained strong last year, as the auto and industrial chips cycle remained stronger for longer than phones and PCs. Meanwhile, since EUV machines are so large and critical for technology transitions, ASML still grew EUV as well, as leading foundries competed to gain technology leadership.

That's why even though there was a very big downturn for several other equipment companies last year, ASML still managed to grow revenue by 30% in 2023. However, in the second half of last year, the auto and industrial sectors took a hit, and memory companies also severely cut back on their spending. So even though ASML was able to grow revenue by "catching up" with orders, new bookings actually fell through the year, indicating tepid growth ahead.

That is, until the fourth quarter, when bookings spiked again.

Data source: ASML Q4 2023 presentation. All numbers in millions of euros.

The semiconductor sector isn't monolithic, and there are some crosscurrents -- both positive and negative. However, ASML's strong orders indicate some end markets like PCs and phones may be bottoming and recovering stronger than expected one quarter ago. In addition, management noted the strong artificial intelligence (AI) demand across many tech companies already. CEO Peter Wennink said on the conference call:

Our customers are still not certain on the shape or slope of the recovery this year but there are some positive signs in the indicators we have been monitoring. Industry end market inventory levels continue to improve, moving toward more healthy levels. Lithography tool utilization levels are still running lower than normal but are now improving in both logic and memory.

While ASML didn't officially change its revenue outlook for 2024, management seemed to indicate it may be being conservative, saying, "We feel it might be a bit too early to change our perhaps conservative view as communicated last quarter."

Growth will come, whether next year or in 2025

Previously, ASML saw 2024 as a "transition year" after several years of very strong revenue growth, but also predicted growth would reaccelerate strongly in 2025. That should be a year in which 2 nanometer foundries begin to spring up, and the memory industry is projected to perhaps spend more after dramatic cutbacks.

However, with orders spiking so much in the fourth quarter, it appears that growth may come a bit earlier and stronger than ASML expected. That's why ASML's stock spiked in January, and why the stock has now recovered all the way back to its 2021 highs.