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ASML – Powering through weakness – Almost untouchable – Lead times exceed downturn

ASML – Powering through weakness – Almost untouchable – Lead times exceed downturn
by Robert Maire on 01-26-2023 at 10:00 am

Robert Maire Bloomberg ASML

-Demand far exceeds supply & much longer than any downturn
-Full speed ahead-$40B in solid backlog provides great comfort
-ASP increase shows strength- China is non issue
-In a completely different league than other equipment makers

Reports a good beat & Guide

Revenues were Euro6.4B with system sales making up Euro4.7B of that. EPS was Euro4.6 per share. All beating expectations. 18 EUV systems were shipped and 13 systems recognized. Most importantly order intake was Euro6.3B of which EUV was Euro3.4B. In essence , ASML’s book to bill ratio remains very strong at better than 1.3.

ASML has a huge, multi year backlog of Euro40.4B, which keeps them very warm at night. Reassuringly , the backlog continues to build.

Backlog timeframe well exceeds any possible downturn length

With Euro40.4B in backlog and continuing strong orders, ASML has a multi year backlog. The bottom line is that customers never get off the order queue and the queue keeps growing in length.

Customers understand the long term growth model of semiconductors and are clearly ignoring a short term weakness whether its 6 months, a year, or more. ASML will ride over any expected weak period.

Other equipment makers, who compete for business with quick lead times are not so fortunate and will revert to a “turns” business and see orders fall off as customers can easily get out of the order queue and get back on when the industry picks up again.

ASP increases demonstrate strength

ASML mentioned that its EUV ASPs are increasing from 160M to 165-170M which further indicates the level of strength that being a virtual monopoly brings. ASML is the only EUV game in town and can price to market. DUV pricing has also increased. Both based on productivity parameters.

We highly doubt that other semiconductor equipment segments are able to push through price increases in the face of falling orders, even with increased performance, which they usually give away for free.

This is one of the keys that separates ASML from others in the semi equipment market and puts them in a league of their own. ASML is looking at an up 2023 while others are talking about WFE being down 20%.

This also implies that if lithography spend is actually up in 2023 the non-litho is actually down more than 20%, further separating ASML from other semi equipment makers

Full speed ahead with high NA and production capacity increases

ASML has been under a lot of pressure to increase production and has spent a huge amount of both money and effort with suppliers, most notably Zeiss, to increase production to an expected 60 EUV and 375 DUV systems in 2023.
ASML will continue to spend as the job is not over as they need more capacity. Also a major expense is the high NA product which is seeing a large spend in development in advance of any revenue.

This all suggests that ASML’s results might be even better without the “headwinds” of additional spend they currently have. Clearly the spend is relatively minor with a Euro7.4B cash balance and strong earnings, they are very comfortably awash in cash.

Results will still vary as to mix and lumpiness

Given the high ASP of systems and the differential between ASPs of DUV & EUV we expect lumpiness in quarters depending upon what is shipped in which quarter and where customer near term demand goes. ASML is expecting a slightly weak Q1 which appears to be due primarily to mix and normal lumpiness, we are not in the least concerned.

China remains a non-issue as semiconductors are a global zero sum game

We have repeated many times that the semiconductor industry is a zero sum game. That is that chip demand remains the same in the face of where the chips are made. If chips are not made in China (due to the embargo) they will be made elsewhere by others, and those others will need the same litho tools that China would have otherwise bought. The only impact is that China is kept out of the leading edge that other countries have access to.

ASML will still sell the same number of EUV tools just shipping them to other places. Although politically sensitive and much talked about, the actual impact on ASML is near zero.

ASML remains above the near term fray maintaining focus on long term

Management, while certainly cautious about near term issues, is rightly more focused on long term issues of capacity and technology. This 5 to 10 year focus is very appropriate given the business that they are in. We saw the lead time in EUV was decades as ASML struggled through advances but was rewarded in the long term for their long dedication to the cause of technology. Building capacity is a long term and costly struggle as is technology and ASML is investing for the future.

The stocks

We continue to view ASMLs valuation as well above the rest of the semi equipment makers, in a league of their own. They are also unique in that their view is of an up year versus everyone else’s expectation of a down year.

Although ASML talked about a potential recovery of the industry in H2 2023, we are a bit more cautious given the depth of this downturn being one of the worst we have seen in a long time. But none of this matters to ASML given their horizon.

We would remain an owner/buyer of ASML stock but would remain light on the rest of the group especially LRCX and AMAT given their shorter term equipment model in the face of the widespread weakness coupled with China issues, a double whammy that ASML does not see.

As with lenses and focus length business that ASML is well acquainted with, being focused on the long term means the short term is out of focus and less relevant to them…..

About Semiconductor Advisors LLC
Semiconductor Advisors is an RIA (a Registered Investment Advisor),
specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.

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