ASML and Memory Loss 2019

ASML reported a more or less in line quarter as expected, coming in at EUR3.14B in revenues and EPS of EUR1.87. However, guidance was worse than most analysts were expecting with Q1 revenues expected to be EUR2.1B or down about one third.

This cut is something we have been talking about for a while as we have expected sharp memory CAPEX cuts with recent logic/foundry cuts adding to the downturn. Since things were going to be bad anyway, ASML decided to throw in the kitchen sink and settle its lawsuit with Nikon which will cut Q1 even further after its payments to Nikon for patent infringement. Orders dropped very sharply from EUR2.2B in Q3 to EUR1.59B in Q4 but more importantly, 80% of those orders were for logic/foundry which means that memory spending has virtually ground to a halt.

This means that memory spending is down about 50% from peak levels.

The breakout of system sales tells the story; USA (meaning Intel since GF is dead) went from 5% in Q3 to 32% in Q4, China stayed at 18%, Korea dropped from 33% to 26% and Taiwan (TSMC) dropped from 30% to 20%. In Q3, memory was 58% of sales whereas in Q4 memory fell to 40%. 5 EUV systems were shipped, same as Q3.

Memory orders fell from 63% of orders in Q3 to 20% of orders in Q4 as memory drove off a cliff without skid marks.
Unfortunately ASML is stuck in a typical downcycle which they can’t do a lot about. In our view, it is clear that ASML will be one of the least impacted companies, as litho systems have the longest lead times and customers never want to step out of the queue for fear of not having litho capacity during an upturn. In addition, ASML also has the significant benefit of the EUV transition which we think remains on track.

Perhaps the biggest question from an investment perspective is how long and how deep is the downcycle. On the call, management echoed statements from their customers which suggested things getting better in H2 2019. However, there is zero evidence to suggest a second half recovery other than hope and good wishes. Even if memory prices stabilize it doesn’t mean that capex spending will pick up again. We would expect capex spending increases to only come after memory pricing has stabilized and perhaps started to move north again.

In the mean time we have a slowdown in foundry spending which will likely add to the length of the downturn as the negative Apple news trickles down through the supply chain.

The company did announce a 50% increase in dividend which will offset some of the negative news and Nikon settlement.

ASML the stock
As we have seen with other stocks, there is increasing down side resistance to bad news or worse than expected news. In addition, ASML has the benefit of more European investors who tend to be longer term and more resistant to near term negative news. European investors will also like the dividend increase. As such we expect the stock to trade flat to up as “it could have been worse” is the likely prevailing sentiment. We still favor the shares of ASML given their monopoly position, EUV progress and solid financial performance.

Collateral Damage
As we have been saying for a while, ASML and KLAC will be less impacted while LRCX and AMAT will be much more impacted by collapsing memory capex.

Lam, which is the poster child of memory making equipment, is the most impacted as at its peak memory was 84% of revenues. Given that TEL and Hitachi have a bigger share of Intel’s spend versus Lam, we do not expect Intel spending to offset memory weakness as it did at ASML. AMAT will be impacted more by weakened spend coming out of TSMC. LRCX reports tonight and we would expect them, to reset their guidance to a lower range than most are expecting, as analysts have been slow to reflect or admit to the reality of the down cycle.