ASML is the world's leading manufacturer of lithography machines used in semiconductor production.
The company is at the forefront of developing extreme ultraviolet (EUV) lithography technology.
ASML has a strong backlog of orders and is well-positioned to benefit from the growing demand for semiconductors.
ASML Holding N.V. (NASDAQ: ASML ) is a Dutch company that is the world's leading manufacturer of lithography machines, which are used to create tiny circuits that are essential for modern semiconductors. Virtually every major semiconductor manufacturer uses ASML machines, including Intel, Samsung, and TSMC.
ASML's technology is at the cutting edge of the semiconductor industry, and the company is constantly innovating to develop even more advanced machines. In recent years, ASML has made significant progress in the development of extreme ultraviolet (EUV) lithography, which is the next generation of lithography technology. EUV lithography is essential for the production of the smallest and most advanced semiconductors, and ASML is the only company in the world that currently manufactures EUV machines.
The demand for semiconductors is growing rapidly, and ASML is well-positioned to benefit from this growth. The company has a strong backlog of orders, and its customers are willing to pay a premium for its machines. As a result, ASML is expected to continue to grow its revenue and earnings in the coming years.
Let's dig deeper and see how the demand for semiconductors affects ASML.
Investment thesis
I believe that ASML is a great investment for the long term. The company has a strong track record of growth, and it is well-positioned to benefit from the growth of the semiconductor market. However, I believe that the company's valuation is currently somewhat stretched, and I would recommend a Hold rating until the company's near-term challenges are resolved.
Company Overview
ASML is the global leader in the lithography equipment market. The company provides chip manufacturers with hardware, software, and services to mass-produce patterns on silicon using lithography. ASML's products are essential for the production of the smallest and most advanced semiconductors, and the company has a dominant market share of over 90% .
ASML's primary product offerings are extreme ultraviolet ((EUV)) and deep ultraviolet ((DUV)) lithography systems. EUV lithography is the next generation of lithography technology, and it is essential for the production of the smallest and most advanced semiconductors. ASML is the only company in the world that currently manufactures EUV machines, and as a result, the company has significant pricing power going forward.
Asml's regions (Asml Presentation)
ASML is a global leader in the lithography equipment market, with sales in over 27 countries across three regions: Asia, North America, and EMEA. The company's largest market is Asia, which accounts for over 88% of total sales. North America is the second-largest market, with a share of around 10%. EMEA is the smallest market, with a share of around 2%.
The company's strong sales in Asia are driven by the region's large and growing semiconductor industry. China is the largest semiconductor market in the world, and it is one of ASML's largest customers. Other major markets in Asia include South Korea, Taiwan, and Japan.
Let's skip the introduction and get to the good stuff.
As evident from the chart above, an investment in ASML over the past decade would have yielded a superior return than the S&P 500 Index (SPX). However, I believe that this trend will reverse in the near term. I anticipate that ASML will underperform the SPX soon. Let me explain why I believe this is the case.
ASML's outlook
Asml outlook (Asml Presentation)
ASML is a highly transparent company with a strong track record of providing investors with clear and concise guidance on its prospects. However, in its most recent earnings report , the company provided mixed results and a disappointing forward forecast.
While ASML beat its second-quarter forecast and met its gross margin forecast, so where are the mixed results?
ASML provided guidance for Q3 2023 and the full 2023 outlook , and there is the mixed results, as ASML raised her guidance for 2023 from 25% growth to 30% growth, the company lowered its gross margin forecast for the second half of the year due to rising costs.
Important Notes
Our customers across different market segments are currently more cautious due to continued macro-economic uncertainties, and therefore expect a later recovery of their markets. Also, the shape of the recovery slope is still unclear.
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 manage its costs and raise the prices for its products, which did not happen.
Well, if I would know this, then I would probably give you some outlook on 2024. But I just refer back to what we call the firm demand from our customers which -- and the strong backlog. And of course, as you understand, our full 2024 year is not fully covered by PO. So, still POs need to come in, but we do have firm demand.
As Peter Wennink said "We do have firm demand" so, Asml have a strong demand and they are not experiencing a slowdown in long-term demand and have a large backlog. I expect them to raise their prices.
Long-Term Horizon
After a little bit disappointed guidance to 2023, the company provided positive long-term guidance :
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.
Valuation
Asml's Estimates Revenue (Created and calculated by the author based on Asml financial reports and the author's projections)
I used a discounted cash flow ((DCF)) methodology to assess ASML's fair value. I assumed that the company's revenue would grow at a compound annual growth rate ((CAGR)) of 8% between 2023 and 2028, based on the strong demand for its products as a monopoly company with high pricing power. The revenue growth rate that I assumed for ASML between 2023 and 2030 is 9.6%, which is by company guidance. This is much lower than the company's historical growth rate ((CAGR)) of 20.9% between 2016 and 2022.
I also assumed a weighted average cost of capital ((WACC)) of 8.3%. Based on these assumptions, I estimate ASML's fair value at €658.44 per share, which represents a 1.6% upside compared to the market price at the time of writing.
The valuation reflects a 2024 P/E of 27.16x, based on my EPS projection for 2024. This is in line with the consensus, reflecting ongoing share buybacks.
Author's assumption (Created and calculated by the author)
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.
Risks & challenges
Rising costs: ASML has already lowered its gross margin forecast for the second half of 2023 due to rising costs. If these costs continue to rise, it could impact the company's profitability.
Economic slowdown: The global economy is facing some headwinds, and this could lead to a slowdown in the demand for semiconductors. If this happens, it could hurt ASML's sales and profits.
New entrants: There are a few companies that are developing lithography machines that could compete with ASML. If these companies are successful, it could reduce ASML's market share and profitability.
Technology disruption: The semiconductor industry is constantly evolving, and there is always the risk of new technology emerging that could disrupt ASML's business.
Conclusion
ASML is a well-positioned company with a strong track record of growth. The company 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.
However, the company's near-term outlook is mixed. The company has raised its guidance for 2023, but it has also lowered its gross margin forecast for the second half of the year. This is due to rising costs, which are impacting the company's margins.
In the long term, I am optimistic about ASML's prospects. The company is well-positioned to capitalize on the growth of the semiconductor market. However, I believe that the company's valuation is currently somewhat stretched, and I would recommend a Hold rating until the company's near-term challenges are resolved.
I believe that ASML is a great investment for the long term, but I would wait for a better entry point before adding the stock to my portfolio.
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ASML reports €6.2 billion total net sales and €1.6 billion net income in Q2 2024 ASML continues to expect 2024 total net sales to be similar to 2023, supported by a strong second half year VELDHOVEN, the Netherlands, July 17, 2024 – Today, ASML Holding N...
ASML discloses 2024 AGM results Veldhoven, the Netherlands, April 24, 2024 – ASML Holding N.V. (ASML) today announces the results of its Annual General Meeting (AGM) held on April 24, 2024. The 2024 AGM marks the end of the terms of Peter Wennink and Martin van den Brink as Presi...
ASML reports €5.3 billion total net sales and €1.2 billion net income in Q1 2024 2024 outlook unchanged VELDHOVEN, the Netherlands, April 17, 2024 – Today, ASML Holding NV (ASML) has published its 2024 first-quarter results. Q1 total net sales of &...
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