ASML Q3 24 – The Inevitable

The Chinese are no longer stockpiling.  

• The combination of economic-related delays and China realising that stockpiling ASML equipment ahead of further bans might not help them very much has caused ASML to lower its outlook for 2025 resulting in a large correction.
• ASML reported good results but the outlook for FY 2025 has been taken down, which caused the consternation observed yesterday in the share price.
• Q3 2024 revenues / EPS were €7.5bn / €5.28, nicely ahead of estimates of €7.18bn / €4.90, but what followed was not well received.
• ASML has taken down its medium-term guidance implying that what it is facing now is more than just a blip.
• Q4 2024 guidance is in line with expectations at €8.8bn – €9.2bn but guidance for 2025 has dropped to the low end of expectations.
• At its analyst day in 2022, ASML set a range of expectations for 2025 revenues at €30bn – €40bn but based on the visibility the company now has, 2025 revenues will be in the lower half of the range and be somewhere between €30bn – €35bn.
• ASML put most of the blame on low numerical aperture EUV systems used at 7nm, 5nm and 3nm (the current systems) where both foundries and memory customers are being more cautious and ramping their new nodes more slowly than previously expected.
• This is clearly part of the story, but I think that ASML is downplaying the impact of China where it looks like the stockpiling of older machines has come to an end.
• Every October for the last 2 years has seen increased restrictions being placed on exports of semiconductor equipment to China and 2024 looks like it will be no different (see here).
• However, 2024 may contain a provision that prevents machines that have already been sold from being updated or serviced if they are being used to make chips below 20nm.
• Updates and servicing are crucial to maintaining good yields and so this would have the impact of turning many of the machines that China has purchased and stockpiled ahead of expected sanctions, into very expensive paperweights.
• I don’t think all is lost as I expect that Chinese clients should be able to resell these machines into the second-hand market to customers in unrestricted countries, but it greatly undermines China’s goal of becoming technologically self-sufficient.
• Hence, I think that just the threat of this update has made Chinese clients think twice about stockpiling further and you can see it in the numbers.
• In Q3 2024, China made up 47% of company-wide revenues and this is now expected to fall to around 20% of revenues in 2025.
• This will also put pressure on gross margins as China predominantly buys older immersion machines and older machines tend to have higher margins than newer ones as a result of lower R&D being present in the cost of goods sold (COGS).
• All of this excludes AI where ASML continues to see very strong demand which at the moment, shows no sign of abating.
• However, this is clearly not enough to offset the end of Chinese stockpiling and caution from memory and foundry customers resulting in a significant shortfall relative to previously set expectations.
• When the AI correction comes, as it inevitably will, this will set back expectations further although probably not as much as this.
• The net result is a stock that is on 25x 2025 PER (after reducing expectations) and has a question mark over its medium-term growth profile.
• Semiconductor companies that do the manufacturing tend to be cyclical and at this valuation, I am still not very interested in picking it up.