2023-10-19 15:11:36 ET
Summary
- We reiterate our Hold rating on ASML Holding N.V.
- The company's Q3 2023 results, Q4 2023, and 2024 outlooks have confirmed our negative thesis of softer EUV demand.
- The risk of the US Department of Commerce's expanded ban risk has now turned into a reality and will be a headwind for advanced DUV demand and the semi-cap space.
- While we remained optimistic about ASML’s outperformance in the mid to long term period, we don’t see the stock working in the near term.
- We advise investors to remain on the sideline until we see evidence of green shoots, possibly in early or mid-2024.
Our concerns regarding the higher risk profile for the semi-cap in the near-term are playing out; we reiterate our hold-rating on ASML Holding N.V. ( ASML ). The company's Q3 2023 results and guidance for next quarter confirm our negative thesis of softer extreme ultraviolet ("EUV") demand in the back end of the year due to lackluster end demand in 2023 and 1H24. Management now expects 2024 to be the transition year, building for demand growth for 2025; we don't see demand for lithography tools picking up ahead of mid-2024 and expect ASML stock to remain an in-line performer in the near term.
The company maintains its 30% Y/Y net sales guidance for FY23; we're not too optimistic about this number, as we think the current guidance is highly reliant on Chinese customers panic buying deep ultraviolet ("DUV") tools out of fear the Biden administration ban will expand, which it did earlier this week. Washington announced new rules on Tuesday preventing the sale of A.I. related chips to China, including Nvidia's ( NVDA ) A800 and H800 chips.
We have seen higher-than-expected Chinese demand this quarter, largely due to double-ordering ahead of true demand and panic buying. China accounted for 46% of sales by region shipped to this quarter, up from 24% last quarter. Management expects higher Chinese DUV sales to offset slower EUV growth. The following image outlines ASML's sales by region in Q3 2023 versus Q2 2023.
ASML 3Q23 earnings presentation
China-related shipments surged 82% QoQ to 46% of total system shipments. While substantially higher demand from Chinese customers has been reflected in Q2 2023 and Q3 2023 results, we don't believe the higher DUV sales will drive outperformance. Last quarter, management lowered EUV growth forecasts and increased DUV growth forecasts, and this quarter, revenue declined 3% QoQ and grew 15.5% Y/Y to €6.7B, trailing consensus estimates at €6.74B. We think this shows that outperformance for ASML will be driven by EUV growth and industry transition to advanced technologies rather than high (unsustainable) demand for older tools. More specifically, we now expect a pickup in industry lithography tools toward mid-2024 as DRAM manufacturer's transition to EUV while foundry and logic customers adopt sub-3nm nodes.
We see no near-term catalyst pushing EUV growth, and neither does management; ASML is guiding for net sales between €6.7B and €7.1B for Q4 2023, noting :
"The semiconductor industry is currently working through the bottom of the cycle... Customers continue to be uncertain about the shape of the demand recovery in the industry."
We expect ASML stock to not work in the near term. We recommend investors remain on the sideline until we see evidence of green shoots near mid-2024.
Valuation
The stock is trading above the peer group average, and we don’t think the higher multiple is justified given the current macro headwinds. On a P/E basis, the stock is trading at 29.7x C2023 EPS $19.38 compared to the peer group average of 31.4x. The stock is trading at 8.9x EV/C2023 Sales versus 5.5x. We remain cautious on the stock in the near term and don’t see favorable entry points in the near term. The following chart outlines ASML’s valuation against the peer group.
TSP
Word on Wall Street
Wall Street is still bullish on the stock largely due to ASML’s dominant position in the lithography market. Of the nine analysts covering the stock, six are buy-rated, one is hold-rated and the remaining are sell-rated. The stock is currently priced at $583 per share. The median sell-side price-target is $761, while the mean is $675 with a potential upside of 16-30%. The following charts outline ASML sell-side ratings and price-targets.
TSP
What to do with the stock
We maintain our Hold rating on ASML Holding N.V. The stock is down 16% since our downgrade to Hold, underperforming the S&P 500 (SP500) by around 11%. We think the near-term challenges will continue to play out into 2024 and don’t see a favorable risk-reward profile into 2024. We see slower EUV growth and no near-term catalyst to offset macro weakness. Additionally, we think the stock is at higher risk due to the U.S. Department of Commerce’s expanded ban in the near term. We advise investors to remain on the sidelines.
For further details see:
ASML: Reiterate Caution On This Semi Cap - No Near-Term Catalyst