ASML Holding (ASML -1.91%) has been rising steadily on the stock market in 2024, but its rally came to a halt as investors pressed the panic button following the release of the company's first-quarter 2024 results on April 17. Investors weren't impressed with the Dutch semiconductor giant's outlook for the current quarter, which points toward soft spending on the semiconductor equipment that it sells. As a result, the stock fell more than 7%.
Below is a look at ASML's latest numbers. Does this drop present a buying opportunity for investors looking to capitalize on the growing demand for artificial intelligence (AI) chips?
Mixed results, but the bigger picture remains bright
ASML reported first-quarter revenue of 5.3 billion euros, or $5.63 billion, down nearly 21% from the year-ago period. This was lower than the Wall Street estimate of $5.87 billion. Earnings declined to 3.11 euros from 4.96 euros per share in the year-ago period. In U.S. dollar terms, the company reported earnings of $3.31 per share, which was ahead of the $3.15 per share consensus estimate.
The sharp decline in ASML's revenue wasn't surprising as management had already warned that 2024 is going to be a transition year. Chipmakers have been cautious with their spending on semiconductor manufacturing equipment. Still, investors were probably hopeful that the booming market for AI chips would encourage chipmakers and foundries to place more orders for ASML's lithography machines.
After all, ASML's net bookings (which refers to the systems sales orders that the company receives) in the fourth quarter of 2023 tripled year over year to a record 9.2 billion euros. This big surge was driven by 5.6 billion euros worth of orders for extreme ultraviolet lithography (EUV) chips, which are used for making advanced chips that serve artificial intelligence (AI) applications.
However, ASML received fewer bookings worth 3.6 billion euros in the first quarter of 2024. That was a big drop sequentially and missed the consensus estimate of 4.63 billion euros by a wide margin. More specifically, ASML received just 656 million euros worth of orders for its EUV machines, signaling that chipmakers have hit the brakes on buying high-end manufacturing equipment.
This also explains why ASML issued disappointing guidance for the current quarter. The company expects revenue to land between 5.7 billion euros and 6.2 billion euros in Q2. The higher end of that guidance is lower than analysts' expectations of 6.5 billion euros.
However, it's worth noting that ASML has stuck to its full-year guidance, which calls for a flat revenue performance as the semiconductor industry recovers from the downturn that was prevailing until last year. This was due to the weakness in key consumer electronics markets such as smartphones and personal computers (PCs).
A stronger second half of the year?
CEO Peter Wennink is predicting a stronger second half this year than the first half, which would be "in line with the industry's continued recovery from the downturn." The good part is that ASML has a solid backlog of orders that could eventually allow it to fulfill its forecast. The company ended Q1 with an order backlog of 38 billion euros, and its full-year guidance indicates that it should end 2024 with a top line of 27.5 billion euros, in line with its 2023 reading.
ASML's first-quarter guidance and the outlook for the second quarter indicate that it's set to finish the first half of 2024 with revenue of 11.3 billion euros. So the company needs to deliver revenue of just over 16 billion euros in the second half of the year, and its backlog suggests that it is well-positioned to do so.
More importantly, ASML points out that the orders it receives can vary from quarter to quarter. It has received close to 13 billion euros worth of orders in the past six months and expects to clock a quarterly bookings run rate of 4 billion euros for the final three quarters of the year. Even if the company meets its full-year revenue forecast, it will go into 2025 with a healthy order backlog of 34 billion euros.
That should ideally set the company up for robust growth next year, which management already is expecting. ASML management points out that a "significant number of new fabs" are being constructed globally, and they'll require investments in semiconductor manufacturing equipment. According to industry association SEMI, 58 new semiconductor fabrication plants are expected to be constructed between 2024 and 2030.
Not surprisingly, spending on semiconductor equipment is expected to jump from $89 billion in 2023 to $176 billion in 2030. ASML's addressable market should continue expanding in the long run, and orders for the company's equipment should also remain strong as more fabs are built.
What should investors do?
The semiconductor market is likely set for secular growth, and this should be a tailwind for ASML, considering that it supplies critical chipmaking equipment that's fueling the growth of new technologies such as AI. This probably explains why analysts are expecting the company's earnings to increase at an annual rate of 21% for the next five years.
The company finished 2023 with $21.22 per share in earnings. Assuming its bottom line grows at 21% a year for the next five years, its earnings could increase to $55 per share by the end of 2028. The Nasdaq-100 index has a forward earnings multiple of 26. Assuming ASML trades at that valuation after five years, its stock price could jump to $1,430, a potential jump of 55% from current levels.
ASML is currently trading at 44 times forward earnings because of the flat bottom-line growth it's expected to deliver in 2024. However, the previous paragraph tells us that it could deliver robust gains, even if it trades at a discounted valuation after five years.
That's why investors would do well to capitalize on the pullback in ASML stock to buy more shares. The company's weakness should ideally be temporary considering its sizable backlog and the long-term growth opportunity in the semiconductor equipment market.
