To The Moon

ASML ( $ASML Holding NV(ASML)$ ) is currently trading 20.58% below its all-time high of $1098.95 and remains 2.55% higher than its previous low of $852.84.

Key Points About ASML:

1) Lower Earnings Growth Due to Reduced EUV Deliveries, Expected to Change in 2H2024

• Both sales and net profit beat street expectations: Net sales: €6.24 billion vs €6.03 billion expected Net profit: €1.58 billion vs €1.43 billion expected

• 2Q2024 sales saw a -9.55% YoY growth, while operating income declined -18.93% YoY.

• The primary reason for lower revenue/operating income growth is the reduced EUV deliveries in Q1 and Q2. Only 19 EUV systems were sold in Q1 and Q2 2024, compared to 31 during the same period last year.

• During ASML’s earnings call, CEO Christophe Fouquet stated, “We expect EUV revenue growth in 2024. We plan to recognize revenue on a similar number of EUV systems as 2023, with expected revenue from one to two High NA systems.”

• This implies that around 34 EUV units should be sold in 2H2024, likely resulting in higher YoY net sales, operating income, and profit margins in 2H2024 compared to 1H2024. We should see higher EUV units sales recognised in 2H2024 compared to 1H2024 with only 19 EUV units sales recognised.

Source: Bloomberg, Tiger Brokers

2) ASML Sales Could Fall Due to Tighter China Curbs

• China accounted for 49% of ASML’s total sales in 1H2024, compared to 29% in FY 2023.

• At the end of Q2, ASML had an order backlog of around €39 billion. If 49% of this backlog comes from China, ASML may face difficulties fulfilling these orders due to potential tighter China curbs. Wall Street currently doubts ASML can fulfill most of its DUV backlog.

What is the China curbs story?

1. Since 2019, ASML has been banned from exporting its most advanced EUV lithography machines to China. Recently, certain types of less advanced DUV machines have also been restricted. This year, ASML announced it was blocked from exporting a "small number" of advanced machines to China.

2. According to Bloomberg, the Biden administration is considering more restrictive trade policies on companies like ASML, potentially further limiting DUV deliveries to China.

3. Trump has suggested Taiwan should pay the US for protection and claimed Taiwan has taken “about 100%” of America’s semiconductor business. ASML’s major customer, TSMC, could be impacted by disruptions in Taiwan's semiconductor supply chain.

• While concerns about China tech curbs are valid, it is likely we won't see a final decision on export curbs until after the presidential inauguration on January 20, 2025. The more than 20% drop from ASML's all-time high suggests the market has priced in much of this pessimism.

3) Lower Guidance Is Manageable

• Both net sales and gross margin guidance are below consensus: Total net sales in 3Q2024 are expected to be between €6.7 billion and €7.3 billion. The midpoint of €7 billion is 8.6% below the analysts consensus of €7.6 billion. Gross margin in 3Q2024 is expected to be between 50% and 51%, with a midpoint of 50.5%, which is 61 bps below the analysts consensus of 51.1%.

• Management views 2024 as a transition year and expects 2025 to be strong. I reckon the strong backlog should be sufficient to meet the company’s sales targets for 2025.

Conclusion:

• I am long-term constructive on ASML because it is the only company in the world that currently manufactures extreme ultraviolet (EUV) lithography machines. Its High-NA EUV will increase profit margins once production ramps up.

• Geopolitcal tensions will always be an overhanging risk for ASML. I reckon ASML would always be one of the most impacted company due to its technological superiority.

• Bloomberg analysts' consensus currently shows that ASML has a 12-month target price of $1058.82, representing an upside potential of 27.3% relative to yesterday’s closing price of $831.60.