As a rule, companies that urge investors to shrug off poor news, and focus instead on tomorrow’s prospects, are peddling poor advice. Yet ASML, Europe’s €350bn lone tech giant, is a rare exception.
The Dutch chipmaking equipment provider has issued what could have been a concerning set of quarterly results. Sales of €5.3bn came in at the midpoint of company guidance. But China accounted for a massive 49 per cent of the machines it sold, as local chipmakers hoovered up older equipment not restricted by sanctions.
Those hoping that the much-rumoured chip upcycle would show through in new orders were also disappointed. At €3.6bn, these were less than half those in the last, blockbuster, quarter of 2023. This was also lower than the €5bn that analysts had been expecting, says Simon Coles at Barclays. ASML is continuing to invest in capacity, hiring people, building clean rooms and even pre-building equipment that it has not yet sold.
This makes for uncomfortable reading, especially given the group’s strong share price run. Indeed, its stock fell about 6 per cent on Wednesday.
This choppy quarter should not obscure ASML’s unassailable market position. Orders for its machines — each of which costs hundreds of millions of dollars — are notoriously lumpy.
Demand is building. ASML’s clients, manufacturers such as TSMC and Samsung, are coming out of a slump, normalising inventories and increasing utilisation rates. Policy also provides a helpful push. Chipmakers are building new fabs, fuelled by funds from the US’s Chips Act. Samsung has been awarded $6.4bn and will build capacity in Texas. TSMC is setting up shop in Arizona. Both will need chipmaking equipment.
Longer term, as the world gets caught up in the artificial intelligence frenzy, it is hard to think of a sector with stronger secular tailwinds than computing power. And, most meaningfully, ASML has the luxury of being the only supplier of extreme ultraviolet (EUV) lithography units, which use tiny wavelengths to print patterns for more powerful chips. Its latest iterations make more chips per hour, lowering production costs for customers. ASML can then not only increase sales but also prices and margins.
All this underpins ASML’s continued conviction that it can make between €30bn and €40bn of sales in 2025, up from €27.5bn last year, with high gross margins of about 55 per cent. For that, it is well worth holding one’s nerve.