To The Moon

Photolithography industry giant $ASML Holding NV(ASML)$ unveiled its mixed Q3 financial report.

In comparison to the expectations, the Q3 revenue was 6.67 billion euros, falling short of both the analysts' estimates of 6.73 billion euros and the midpoint of the management's previous quarter's forecast.

However, the profitability exceeded expectations, with a Q3 gross profit margin of 51.9%, significantly surpassing the management's projected 50%. And net profit reached 1.89 billion, outperforming the analysts' expected 1.83 billion:

While the results are mixed, it's worth noting that ASML's Q3 order intake of only 2.6 billion euros marked a staggering 70.8% year-on-year decline. This decline represents the most significant downturn since data has been available since 2011 and may raise concerns among investors.

Furthermore, the management anticipates that the revenue for 2024 will remain in line with the current year, while analysts project a growth of 4.6%. The prospect of a new growth cycle not materializing until 2025 could potentially erode investor confidence.

Presently, ASML is experiencing a significant decline in its European stock market price, with a temporary drop exceeding 4%:

Despite the Q3 report deviation, from a medium to long-term perspective, ASML may still maintain its upward momentum.

In detail, ASML's Q3 revenue amounted to 6.67 billion euros, marking a year-on-year growth of 15.5%:

The revenue growth is primarily attributed to the backlog of orders accumulated previously, with a significant surge in demand for mature process lithography equipment, particularly from China, as a preventive measure against potential escalations in U.S. chip bans.

In the third quarter of this year, the proportion of system sales revenue from mainland China reached 46%, compared to 24% for the same period last year:

The Q3 gross profit margin stood at 51.9%, with a net profit of 1.89 billion euros, marking a year-on-year growth of 10.6%:

The Q3 gross profit margin has significantly exceeded management's expectations, primarily due to the increased proportion of sales from more advanced immersion lithography machines and, secondly, due to one-time income disruptions.

Looking ahead to the next quarter, ASML anticipates revenue to range between 6.7 to 7.1 billion euros, with analysts expecting 6.914 billion euros. The management retains its projection for a 30% full-year revenue growth in 2023, with an expected gross profit margin for the year at 51%, slightly surpassing the 50.54% recorded in the same period last year.

The Q3 orders amounted to 2.6 billion euros, reflecting a substantial 70.8% year-on-year decline. This was primarily due to capital expenditure reductions by semiconductor foundries. While the magnitude of the decline exceeded expectations, it wasn't entirely surprising given the circumstances.

Conversely, based on industry insights, the management believes that destocking by downstream customers has reached its conclusion, and the Q4 is expected to see a rebound in demand. A recovery is anticipated in 2024, although the magnitude of this revival remains uncertain at present.

Being an upstream semiconductor equipment manufacturer and considering the relatively extended lead times in photolithography machine manufacturing, ASML's performance lags slightly behind the cyclical shifts. However, in comparison to the Philadelphia Semiconductor Index $Philadelphia Semiconductor Index(SOX)$ , ASML's stock price has closely tracked the index's movements:

Hence, even though ASML's performance in 2024 might appear subdued, it's worth considering that the current P/E valuation has receded to approximately 29 times, close to historical averages. If there is a resurgence in semiconductor demand in the future, ASML might align with sector rebounds. Looking ahead to 2025, the management continues to forecast revenue reaching 30-40 billion euros, with a gross profit margin ranging between 54% to 56%. Based on these projections, revenue growth for 2025 could potentially reach as high as around 30%:

As for the U.S.-China semiconductor battle, it's important to note that EUV technology has never been sold to China, and no such machine has been exported. Furthermore, the advanced DUV photolithography machines have obtained export licenses. All in all, the impact of the escalating U.S. chip ban appears to be relatively limited.

Even though advanced DUV machines cannot be directly sold to China, the demand for electronic products in China remains robust. This demand is met by outsourcing production to overseas foundries like TSMC $Taiwan Semiconductor Manufacturing(TSM)$ , Samsung $Samsung Electronics Co., Ltd.(SSNLF)$ , and others. The demand for photolithography machines eventually shifts from Chinese foundries to those of their counterparts.