Why is China not the only problem facing the company?
ASML Holding (ASML 2.50%) shares fell sharply after the semiconductor equipment maker lowered its guidance and said some chip market recovery will continue into 2025. This decline has pushed stock prices into negative territory since the beginning of the year.
Stocks came under pressure after the U.S. government announced earlier this year that it was considering introducing tougher trade restrictions on companies selling advanced technology to China. The Netherlands has introduced its own export regulations related to ASML’s semiconductor equipment, requiring permission from the Dutch government to export some equipment.
With this backdrop, let’s take a closer look at ASML’s Q3 results and see if now is a good time to buy the stock.
China in the spotlight
ASML has long described 2024 as a year of transition. There were two main reasons for this. One is that despite the strong use of chips as part of building artificial intelligence (AI) infrastructure, many areas of the semiconductor industry are having a difficult time. This is very clear when you take a closer look at the performance of more broadly based chipmakers like Broadcom, which has seen declining revenues in areas other than AI. At the same time, the company just started shipping its latest technology, a high numerical aperture extreme ultraviolet lithography system (high NA EUV), and expected it to start gaining momentum next year.
Next year was supposed to be an even better year for the company, but ASML warned that the recovery in areas other than AI is taking longer than expected and is likely to continue into next year. He also mentioned the timing delay in EUV demand.
This need for attention can be seen in the company’s third-quarter bookings, which are new orders signed and often indicative of future growth. The company’s bookings for the quarter were 2.6 billion euros ($2.8 billion), unchanged from a year ago and down 53% from 5.6 billion euros ($6.1 billion) in the previous quarter.
ASML’s revenue for the third quarter rose nearly 12% year over year to 7.5 billion euros ($8.2 billion), falling within the company’s guidance range of 6.7 billion euros ($7.3 billion) to 7.3 billion euros (7.9 billion euros). dollar). Equipment sales increased 11% year-over-year to €5.9 billion ($6.4 billion), and service sales rose 7% to €1.5 billion ($1.6 billion).
ASML sold 106 new lithography systems and 10 used systems in the third quarter, compared to 105 new lithography systems and 7 used systems in the year-ago period. In the second quarter, we sold 89 new lithography systems and 11 used systems.
Looking ahead, the company expects fourth-quarter sales of between 8.8 billion euros ($9.6 billion) and 9.2 billion euros ($10 billion), a steady increase from sales of 7.2 billion euros in the same period last year. I’m going to do it. ASML expected 2025 sales to be in the range of 30 billion euros ($32.6 billion) to 35 billion euros ($38.1 billion), which would be at the lower end of the range it predicted at its 2022 investor day. . Meanwhile, gross profit margin is expected to be between 51% and 53%, lower than previous forecasts.
ASML does not sell its high-end EUV systems to China, but part of the problem for semiconductor equipment makers is that Chinese companies are buying up the company’s older deep ultraviolet lithography (DUV) equipment ahead of expected export restrictions. It seems to be in a hurry. China accounted for 47% of sales in the third quarter of this year, and 49% in both the first and second quarters. This compares to 29% in 2023 and only 14% in 2022. In 2025, sales to China are also expected to return to around 20%.
Image source: Getty Images.
Is this a buying opportunity?
ASML sees demand setback in China due to trade restrictions this year, and business will return to more normal levels. Therefore, we do not believe that China is the main issue facing our company. The company’s business can be volatile, and this is only part of that volatility.
I think the bigger issue is the continued weakness in the highly commoditized part of the chip market and its acceptance of new technology. Although Intel was the first company to adopt and ship ASML’s latest systems, Intel’s foundry business was struggling and the company began cutting costs in the division. Meanwhile, Samsung is also believed to have withdrawn its order. This leaves Taiwan Semiconductor Manufacturing. The company accepted shipments of the new system, but also said the new system was too expensive and that it could make advanced chips without it.
ASML trades at about 22 times forward earnings based on 2025 estimates, near the low end of where it has traded in recent years.
ASML PE Ratio (Forward 1y) Data by YCharts
I think ASML will be fine in the long run, but I think Chinese demand traction and Intel’s struggling foundry business are likely to be headwinds into next year.
Jeffrey Seiler has no position in any stocks mentioned. The Motley Fool has exposure to and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: November 2024 $24 short calls on Intel. The Motley Fool has a disclosure policy.
