2023-04-18 08:00:16 ET
Summary
- TSMC is contemplating a staggering 40% reduction in its EUV orders, signaling a significant slowdown in its capacity expansion plans in Taiwan.
- Samsung and Intel could follow suit to reduce costs, putting visibility over ASML's EUV orders at significant risk of a downgrade.
- ASML's concentrated EUV exposure is now coming home to roost, putting further pressure on its expensive valuation.
Leading EUV lithography equipment supplier ASML Holding N.V. ( ASML ) is slated to report its FQ1'23 earnings release on April 19 after a steep selloff yesterday, which also saw other chip equipment or WFE makers such as Teradyne ( TER ) stock getting hit .
Accordingly, ASML finished yesterday's trading session down more than 4%. It's also down nearly 7% from its late March highs, as ASML again failed to clear its March 2022 and February 2023 resistance zones ($700 to $720 level).
Notably, DIGITIMES reported that TSMC ( TSM ) could slash its EUV orders this year by more than 40% and " delay taking shipments due to slowing fab capacity expansions in Taiwan."
Furthermore, it may not stop at TSMC, as Intel ( INTC ) and Samsung ( SSNLF ) could also follow TSMC's lead in reducing their orders for ASML's EUV machines.
As such, it could throw the company's near- and medium-term EUV projections into disarray, as ASML projected EUV unit sales to reach 60 this year, up from FY22's 54 units.
Moreover, Wall Street analysts have already factored in revenue recognition from FAST shipments in FQ1'23 before normalizing. Accordingly, ASML is projected to report revenue growth of 79.3% for FQ1 before falling to 18.4% in FQ2.
Analysts' estimates for FY23 see ASML reporting about 24.8% topline growth for FY23, pulled forward by the revenue recognition in FQ1. As such, we believe analysts have likely baked in some pessimism over a slowdown in WFE orders but might not have penciled in a bigger hit as reported by DIGITIMES.
Given ASML's reliance on orders from Intel, Samsung, and TSMC for its EUV tools, the concentrated exposure is coming home to roost, despite its monopoly in EUV lithography machines.
It's also important to pay attention to its services business momentum, which accounted for 25% of total revenue.
Despite that, the medium- to long-term prognosis for the WFE makers remains robust . Secular tailwinds in AI chips, IoT, and autonomous driving should continue to drive the need for more advanced chips, and not less.
The recent geopolitical uncertainties have not deterred ASML investors from returning to support its upward momentum. Despite Japan joining the fray with the Netherlands and the US to thwart China's semiconductor ambitions, market operators likely assessed that ASML's ex-China business should help mitigate the headwinds.
However, with its leading EUV customers expected to slow down their equipment purchases, investors must assess whether ASML's valuation could have been too optimistic.
Quant factor ratings (Seeking Alpha)
Seeking Alpha's Quant ratings assign ASML's valuation assessment with the worst possible "F" rating, even though its fundamental growth and profitability metrics are robust.
We also gleaned that ASML's NTM EBITDA multiple of 24.6x is above its 10Y average of 21.9x (just below the one standard deviation zone under its 10Y average). However, it's well above its peers' median of 15.2s.
We assessed that while ASML's relative valuation is much more expensive than its peers, as demonstrated in the quant ratings, the market remains confident of its wide economic moat.
Despite that, we urge investors to account for a reasonable margin of safety. However, the current valuation suggests that it's still too aggressive.
Takeaway
ASML is a high-quality WFE supplier with a monopoly over EUV lithography machines. Market operators have been unfazed by the restrictions placed on China that could affect its DUV machines, as ex-China customers could fill the void.
However, with the slowdown in demand by the leading edge foundries and IDMs looking to cut their EUV orders/shipments, ASML's expensive valuation could be at risk of a downward de-rating.
With that in mind, investors should remain patient on the sidelines and consider other opportunities in the semi-industry.
Rating: Hold (Reiterated).
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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ASML Holding: TSMC's Orders Facing Major Risks