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ASML Holding (ASML) Has Room to Run

Netherlands-based ASML Holding N.V. ASML reported a very strong quarter, beating the Zacks Consensus Estimate by 15.7%.

The one thing that sets this semiconductor equipment maker apart is its position in the highly specialized subsegment of the market. As a result, it is in the enviable position of having far stronger order flow than it is able to ship. Not only that, it is also not in danger of losing orders to competition.

Typically, since each of its systems are very high-value, there are in-depth discussions with customers on their future needs and roadmaps well before production commences. Therefore, whatever is produced is immediately snapped up. In the last quarter for example, the quicker installation and acceptance of its systems positively impacted revenue and margins.

Given its strong market position and the strength of semiconductor demand in certain segments, the company’s backlog continues to swell. Management has said on the earnings call that ASML already has more orders than it can ship this year and its current shipment trajectory will generate 25% revenue growth. The gross margin will also expand slightly this year. Additionally, 2024 is shaping up to be even stronger, and management is confident that second half orders will confirm this view.

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China has a big role to play in this, which could be one reason investors are wary. But Chinese chipmakers producing for internal consumption in things like auto (EVs) and energy constitute a lot of this demand. And transitions in these two markets ensure that this growth has a long tail.

Management has also said that the company is passing on part of the inflation-related cost increase. They are also in talks with a major customer for similar cost-sharing that is likely to lead to a positive outcome this quarter.

Overall, while order growth is slowing and there are some push-outs as well as pull-ins, the outlook appears extremely bright. Therefore, it doesn’t make any sense that the shares lost over 3% in extended trading.

The 2023 earnings estimate is already up 18 cents and the 2024 estimate up 16 cents in the last seven days. Since only one of three analysts have raised in this period, further revisions may be expected. At the current level, these estimates represent 37.5% growth in 2023 and 21.0% growth in 2024.

Historically, the shares have always traded at a premium to both the broader industry and the S&P 500. But since the last five years included the pandemic, we can track their performance over the last 10 years instead. Thus we see that the shares trade at a 29.7% premium to the industry compared to a premium of 38.7% average premium in the historical period.

Since end use of semiconductors have only expanded and the company’s competitive advantages have in no way reduced, we can safely say that the shares remain a sold bet, both for the short term and the long term. No wonder then that Zacks has a #1 (Strong Buy) rating on the shares.

Year-to-Date Price Performance

Zacks Investment Research
Zacks Investment Research


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