2023-10-19 05:17:31 ET
Summary
- ASML reported mixed Q3 results, beating EPS expectations but missing revenue expectations.
- Ongoing supply chain challenges and customer uncertainty about semiconductor demand recovery are impacting ASML's results.
- The company's long-term investment thesis remains strong, but near to mid-term headwinds suggest a Hold rating.
ASML Holding N.V. ( ASML ) reported mixed third-quarter results, with EPS of €4.81 beating by €0.12 and revenue of €6.67B missing consensus of €6.96B.
Supply chain challenges are having a significant impact on ASML's business, delaying the delivery of products to customers, increasing costs, and leading to uncertainty about demand. The company is responding to these challenges by investing in new manufacturing capacity, working with its suppliers to improve the lead times for key components, and working with its customers to provide them with greater visibility into its production schedule.
Given these headwinds, I reiterate my Neutral rating on ASML for the near to mid-term.
If you have not yet read my first article ASML's Mixed Outlook : Near-Term Headwinds, Long-Term Promise, I highly recommend reading it before continuing with this article.
Background
In August, I published an article titled "ASML's Mixed Outlook: Near-Term Headwinds, Long-Term Promise." In that article, I argued that ASML is a monopoly company with a strong long-term investment thesis, despite mixed results for the second quarter of 2023.
Now, let's dive into the company's third-quarter results to see how they compare to my projection and the consensus, and to assess whether the investment thesis remains valid.
In my previous article, I rated ASML as a Hold, explaining that it has several near-term headwinds that have caused it to underperform the S&P 500 ( SPX ) index. These headwinds include the ongoing global chip shortage, rising supply chain costs, and the potential for a slowdown in the global economy.
Q3-23 Highlights
ASML reported consolidated revenues of €6.67 billion, up 15% year-over-year. Net system sales increased by 1.31% to 113 lithography systems, reflecting the high demand for Lithography machines from the prior year.
Based on its historical seasonality, the Dutch monopoly company is on pace to deliver 30% growth for the entire year, in line with my expectations and the company's guidance.
Net system sales breakdown (Asml's presentation)
One of the most important factors I look for when analyzing a company is whether it has a moat. ASML has a significant moat, which is expressed in its dominant market share in the lithography machine market.
In my first article, I mentioned that ASML would experience a drop in demand in 2023. This mention was based on my understanding of the semiconductor industry cycle. The company's management has confirmed this expectation, saying that they anticipate a small decline in demand soon due to macroeconomic uncertainty and a recovery that is slower than expected.
Our customers across different market segments are currently more cautious due to continued macroeconomic uncertainties, and therefore expect a later recovery of their markets. Also, the shape of the recovery slope is still unclear.
Peter Wennink, CEO, Q2-2023 Press Release
The company anticipates a small decline in demand soon. This is due to macroeconomic uncertainty and a recovery that is slower than expected. But, in my view, as a monopoly company with a high pricing power and strong demand, I want that the company to manage its costs and raise the prices for its products, which did not happen.
Asml's ebit margins (Authored using company financial data)
As the graph above shows, ASML's monopoly status allows it to maintain product prices even when it expects a drop in demand. This helps the company to maintain stable operating margins in difficult times, such as the current economic environment.
Asml's Q3-2023 margins (Authored using company financial data)
Compared to the third quarter of 2022, ASML's margins improved slightly, with except for net profit. However, this improvement was not enough to offset the headwinds facing the company, and ASML was unable to improve its overall margins.
On the one hand, it is positive that ASML, as a monopoly company, does not "give in" to a lack of demand and lowers prices. On the other hand, this means that the company is unable to improve its margins as a result of the decrease in demand
Important Notes
The semiconductor industry is currently working through the bottom of the cycle and our customers expect the inflection point to be visible by the end of this year. Customers continue to be uncertain about the shape of the demand recovery in the industry.
Peter Wennink, CEO, Q3-2023 Press Release
The semiconductor industry is currently at the bottom of the cycle, meaning that demand is weak and prices are falling. However, there are some signs that the industry may be starting to recover. They believe that demand for semiconductors will start to pick up in the fourth quarter of 2023. However, customers are still uncertain about the shape of the demand recovery.
Based on our current perspective, we take a more conservative view and expect a revenue number similar to 2023. But we also look at 2024 as an important year to prepare for the significant growth that we expect for 2025.
Peter Wennink, CEO, Q3-2023 Press Release
ASML expects its revenue in 2024 to be similar to its revenue in 2023, but is investing heavily in new products and services to be well-positioned for significant growth in 2025. ASML's management is aware of the potential headwinds in the near future.
Overall, ASML's management is aware of the company headwinds and how they affect the company. ASML is facing several risks that I believe will cause the stock price to fall in the near term.
We modeled an opportunity to reach annual revenue in 2025 between approximately €30 billion and €40 billion, with a gross margin between approximately 54% and 56%, and in 2030 an annual revenue between approximately €44 billion and €60 billion, with a gross margin between approximately 56% and 60%.
In my view, ASML's guidance for 2023-2030 is a significant positive for the company. The 12.6% annual revenue CAGR over 2023-2025 and 9.6% annual revenue CAGR over 2023-2030 reflect the strong demand for the company's products. ASML is the leading supplier of lithography machines, which are used to manufacture semiconductors. The global semiconductor market is expected to continue to grow in the coming years, which should benefit ASML. The guidance also suggests that ASML is well-positioned to capitalize on the growth of the semiconductor market. The company has a strong track record of innovation and is investing heavily in research and development. ASML also has a strong customer base, which includes some of the leading semiconductor manufacturers in the world.
ASML has reaffirmed its long-term outlook. This is a positive sign, and I believe the company is well-positioned to achieve its targets.
Updated Financial Model
In the Aug article, I provided my near-term projection for ASML:
Based on ASML's Q2-23 results , I project that the company will generate revenue of €6,750 million in Q3-23. This is in line with the company's forecast. I also project that ASML will achieve an operating profit margin of 31.7% in Q3-23.
After adjusting my model to reflect ASML's Q2-23 results, I now project that the company will generate full-year revenue of €27,598 million in 2023. This represents a growth of 30% from the company's revenue in 2022.
As we can see, the company missed my revenue forecast below and beat my operating profit margin by 1%.
Based on the Q3 results, I expect full-year sales of €27.4B, and I upgraded my operating margin projection to 32.5%.
Based on historical seasonality, I expect 4Q23 sales of €7.10 billion and I also expect ASML to achieve an operating profit margin of 31.7% in Q4-23.
Using a weighted average cost of capital ((WACC)) of 13.40% and factoring in ASML's net debt position, I estimated the company's fair value to be €583 per share.
Due to the risks I mentioned in my first article about demand and ASML missing my revenue forecast in Q3, I reiterate a 'Hold' rating and I estimate that ASML is unlikely to provide market-beating returns in the near-to-mid term.
Conclusion
ASML is a monopoly company with a strong long-term investment thesis. However, the company is facing some headwinds in the near to mid-term, including the global chip shortage, rising supply chain costs, and the potential for a slowdown in the global economy.
ASML's management is aware of these headwinds and is taking steps to mitigate them. However, I believe that these headwinds will weigh on the company's stock price in the near term.
Therefore, I reiterate my Hold rating on ASML stock for the near to mid term.
Editor's Note: This article was submitted as part of Seeking Alpha's Best Value Idea investment competition , which runs through October 25. With cash prizes, this competition -- open to all contributors -- is one you don't want to miss. If you are interested in becoming a contributor and taking part in the competition, click here to find out more and submit your article today!
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ASML: Near-Term Headwinds Weigh On Q3 Results