ASML Holding: Q1 Miss Masks Long-Term Opportunity, But Near-Term Headwinds Remain

seekingalpha04-23

ASML is the leading manufacturer of lithography machines used in semiconductor production, with major clients including Samsung, Intel, and Taiwan Semiconductor.The company has a strong track record ...

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You can become one too! Share your best investment idea by submitting your article for review to our editors. Get published, earn money, and unlock exclusive SA Premium access. Click here to find out more »    SweetBunFactory/iStock via Getty Images ASML Holding N.V. (NASDAQ:ASML) is the world's leading manufacturer of single-use lithography machines, simply put, used to create the tiny circuits essential to modern semiconductors. Virtually every semiconductor player uses ASML machines, including Samsung (OTCPK:SSNLF), Intel (INTC), and the largest Taiwan Semiconductor (TSM). Let's dig in, and find out why long-term investors will benefit from this company, and why near-term investors should stay away from it. Investment Thesis Think about it, it would take a company around 15 years to go from search scratch to developing a workable EUV machine, according to the Asianometry podcast, (by the way I recommend you to listen to this podcast), this technology required significant R&D investments, acquisitions, and partnerships, making it difficult for the competitors like Applied Materials, Inc. (AMAT), and Lam Research Corporation (LRCX) to replicate. Based on what I wrote, I believe that ASML is a pure monopoly company, that has excellent long-term opportunities, and the company's management has confirmed its view. ASML has a strong track record of growth and net order growth, which will benefit revenues in the near future. I believe the company represents a good long-term buying opportunity, as investors know that in the near term, ASML will underperform the S&P 500 (SPX) due to near-term challenges. Business Overview & Q1-24 View As we mentioned earlier, ASML is the leader in the lithography equipment market. ASML provides chip manufacturers with hardware, software and services to use the lithography machines. The company owns an amazing market share of about 90% in the advanced technological immersion business in ArF, and 100% in EUV lithography. ASML offers ultraviolet (EUV) and deep ultraviolet (DUV) lithography machines, ASML is the only company that manufactures EUV machines.   ASML Q1-24 presentation (Company's Presentation ) ASML is a global company, with sales in over 27 countries, with the largest country being China which continues to grow from Q4-23 with 39% of shipments to 49% in Q1-24, remaining the world's largest semiconductor market. The second-largest shipment is EMEA with total shipments of 20% up from 8% in Q4-23. In addition, ASML shipped 12 EUV systems and recognized revenue of €1.8 billion from 11 systems. While the operating profit decreased by 26% (-6.6 points in YoY).   Operating Margin (Company's earnings releases) Despite the current headwinds in the industry, the weak demand of ASML in 2023 managed to maintain an operating profit of 30% - 32%, which means that it is the only company that makes these machines, which is its big moat. In quarter 1-24 we see for the first time the margin drop below 30%, the last time we saw the margin below 30% it was in quarter 1-2022, and in quarter 1-22 the share price dropped by 25% until the second quarter.   Free Cash Flow (Company's earnings releases) As investors, we have to find out what metrics we should look for when we analyze a company, free cash flow is one of the most popular and one of the most important metrics. ASML's FCF is not what you want to see, it is not very stable, there are times it is negative, ASML fails to maintain consistency, this is because of the cyclical nature of the industry. In the first quarter of 2014 the FCF margin fell to 12.6%, i.e. negative FCF compared to the FCF margin of 5% in the same period last year. In Q1-24 total revenues declined 22% YoY to €5.3B, missing the expectation by €90M, and quarterly net booking of €3.61B came below expectation of €5.1B, these two important metrics contributed to the company to fall over 5% after earnings released. In Q1-24 ASML reported sales of 70 units of lithography systems, down 30% QoQ. ASML's Headwinds And What For The Future? Data by YCharts As we can see above, ASML outperformed the S&P 500 (SPY) a year ago, so that a clear view of the picture looks fantastic, ASML outperformed (SPY), but when we dig into management notes, and recent news, the picture has changed.  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. Q2-23 said Peter Wennink, CEO in the press release  That is, the company expects a small decrease in demand soon. Due to rising inflation, geopolitical unrest and lingering effects of the pandemic have contributed to macroeconomic uncertainty and a decline in consumer spending on electronics such as PCs, smartphones and tablets will translate into macroeconomic uncertainty and a slower than expected recovery. Based on growing demand, semiconductors using high-performance computing AI, and electronics and IC sales are expected to return to growth in the fourth quarter of 2023 and continue into 2024, with IC sales expected to see 18% year-over-year growth. In the first quarter of 2024 as demand improves and inventory normalizes, I believe recovery is very close. 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. In Q3-23, Peter Wennink said semiconductors are entering the bottom of the cycle, meaning demand is weak, but management believes semiconductor demand will start to recover in Q4-23, management said. Personally, I don't think the semiconductor recovery has started as management has said, I believe that at the end of 2024 we will start the recovery, as (TSM) reported that they warned about overall growth of the semiconductor market in 2024. 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. In Q3-23, the company said for the first time that management expects its revenue in 2024 to be similar to its revenue in 2023, but they are investing heavily in new products for significant growth in 2025. They recognized the weak demand, and the bottom of the cycle, as we mentioned earlier. So, management is aware of the potential headwinds in the near future. Since Q2-23 ASML has started to show the challenges they face, and we are in Q1-24 the headwinds are still alive and pressing the share price. So what's next?  Our outlook for the full-year is unchanged with similar revenue, compared to 2023. In line with the industry continued recovery from the downturn, we expect a stronger second-half relative to the first-half of the year. We view 2024 as a transition year and continue to make investment this year both in capacity ramp and in technology, to be ready for the upturn in the cycle. Christophe Fouquet - Executive Vice Q1-24 Earnings Release  While the pressure is still alive, the management of ASML is starting to give some green signals for the recovery, and the change of the cycle. The management of the company gave us air to breathe, and we expect that in 2025 we should be ready for the end of the depression and see the buds of an uptrend cycle. Our outlook for the full year 2024 is unchanged, with the second half of the year expected to be stronger than the first half, in line with the industry's continued recovery from the downturn. Peter Wennink, CEO, Q1-24 Earnings Release The forecast has not changed, but Peter expresses cautious optimism for the second half of 2024, giving us another green signal for a recovery that will already affect the second half of the year. Management Outlook Since the downtrend cycle began, management has always kept the long-term guidance alive. Based on different market scenarios1 as presented during our Investor Day in November 2022, 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% After the company reaffirmed its past guidance, I still believe in the future of the company, and believe that the bottom of the cycle will end in the near future. For 2024, the company has not changed its forecast, expecting revenues to be similar compared to 2023, with slightly lower gross margin rates compared to 2023. For Q2-24, the lithography giant expects total net sales between €5.7 billion and €6.2 billion, while gross margin between 50% to 51%. Valuation Data by YCharts ASML is expected to achieve €19.08 EPS in 2024, reflecting 6.19% decline YoY. That puts the stock at a 43.90x P/E, which seems high, reflecting a negative PEG ratio. As we mentioned earlier, the company estimates for recovery in 2025, so let's find if in 2025 the valuation is attractive. For 2025, ASML is expected to bring in €29.59, or 55.22% growth YoY. This would put ASML at a 2025 P/E of 28.21x, and a PEG ratio of 0.5x, which seems very attractive. ASML really has no competitors, as they are the only company that manufactures the lithography systems, and we have no competitor to compare to. Data by YCharts Today's 43.87x PE multiple I think its high valuation for the company as the 5 years average is 42x. Given the lack of growth in 2024, and still no real recovery for the semiconductor industry, I find that ASML is still in fine territory given the challenges I mentioned above. I find ASML attractive for the long term, as management expects the reverse recovery to be in 2025. In line with what I stated at the beginning of the article, I believe we will see rising demand in the semiconductor industry towards the end of 2024, I agree with management's forecast for a recovery in 2025. For investors who want to beat the SPX in the near term, say 2024 and maybe until Q1-25, I don't expect this to be the company you're looking for, there are a lot of headwinds that I think will pressure the stock price in 2024. For long-term investors, I believe ASML is a great opportunity for you, a pure monopoly company, with no competitors as of this writing. With a 2025 PE fwd multiple of 27.35x, reflecting a PEG ratio of 0.5x for 2025, it is very attractive, while the company believes it can achieve its guidance and has affirmed its guidance quarter after quarter. Risks & Challenges   Macroeconomic Uncertainty: The global economic slowdown, rising interest rates, and inflation can significantly impact demand for electronics, ultimately hurting chipmakers and impacting ASML's sales.  Geopolitical Tensions: Ongoing trade wars and geopolitical tensions can disrupt supply chains and create uncertainty for businesses, leading to delays in investments and impacting ASML's order flow.  Inventory Correction: The current inventory correction in the semiconductor industry could extend longer than expected. Chipmakers with excess inventory might hold off on new orders from ASML until they sell existing stock.  Conclusion  ASML presents a compelling opportunity for long-term investors seeking exposure to the semiconductor industry. The company's near-term outlook is tempered by macroeconomic headwinds and a cyclical downturn, but its dominant market share, loyal customer base and commitment to innovation position it for significant growth in the coming years. As management anticipates a recovery in 2025, investors with a long-term horizon can enjoy ASML's potential to deliver significant returns while the share price weathers the current challenges. However, for near-term investors focused on outperforming the market in the coming year, ASML may not be the ideal choice due to the aforementioned tailwinds.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2429463111"}