Take Another Look at This Chip Stock. Shares Could Soar 40%.
Dutch semiconductor-equipment maker ASML Holding has had a rough year as inflation sparked a consumer slowdown and a slump in demand that has weighed on the industry.
The stock (ticker: ASML.Netherlands) has lost 30.3% this year, to 493.60 euros ($486.32). But some upbeat developments could drive the price higher.
ASML is a leading manufacturer of lithography machines used by major semiconductor makers to print dense circuits used in everything from smartphones to autos. The company has pioneered extreme ultraviolet lithography, or EUV, which uses light with a shorter wavelength to etch smaller features, resulting in faster and more powerful chips.
Taiwan Semiconductor (2330.Taiwan), ASML’s biggest customer, warned in October of a cut to capital expenditure, noting weaker demand. Also, the U.S. has new rules limiting the export of chips and related equipment to China.
But the bulk of ASML’s revenue comes from machines making less sophisticated deep ultraviolet technology, or DUVs, which are unaffected by restrictions. And it doesn’t sell its EUV technology in China.
That said, ASML in July lowered guidance for annual revenue growth to 10% from 20%. ASML in October said guidance had improved, but didn’t provide a percentage.
The drop in guidance had more to do with timing and when ASML can book revenue, rather than a drop in orders. Demand continues to exceed supply, and ASML has dispatched machines to customers before final quality-control checks, which shaves a month off its manufacturing process. Final checks are completed at the customer’s site, a process ASML calls “fast shipments.”
While this means payments are deferred until after those final checks, it also means ASML has about €2.8 billion locked in for 2023 shipments.
If fast shipments become the norm and auditors approve a transition to recognize revenue at time of shipment, C.J. Muse, an analyst at Evercore, notes there would be “a meaningful benefit to revenue” earlier than expected.
Another upside is the long lead time of 18 months to manufacture a machine. That means customers are less likely to cancel orders, for fear of losing their place and having to start over.
Muse forecasts the stock could increase nearly 40%, to €575, writing that “ASML’s growth story remains locked-in today, highlighting numerous tailwinds facing the company into next year.” The business has a market value of €160 billion and fetches a multiple of 22.7 times this year’s expected earnings, in line with peers.
The company beat third-quarter earnings estimates, with net income of €1.7 billion on revenue of €5.8 billion. ASML said it expects fourth-quarter sales of €6.1 billion to €6.6 billion. Analysts expect €6.3 billion, according to FactSet.
“While some customers are now adjusting the desired timing of their demand, the vast majority of our customers are still requesting shipment of their lithography systems as soon as possible,” ASML CEO Peter Wennick told Barron’s in a statement. He added that “our 2023 shipment demand is still significantly above our build and shipment capacity for next year.”
The next catalyst for the business will be Nov. 11, when ASML is set to give analysts an update on future revenue. Muse estimates the company will raise 2025 forecasts to about €30 billion from a previous range of €24 billion to €30 billion.
ASML’s shares are likely to get a boost as next-generation lithography technology is adopted at a faster-than-expected pace. That means this big European tech stock is in a good position to outpace its competitors.