ASML Q1 24 – The Big Pull Forward.

ASML really does not want to talk about China.

• ASML reported disappointing Q1 results as bookings dropped and there is clearly a difference of opinion over why China is such a strong element of sales which is setting the company up for a disappointment when the export rules properly start to bite.
• Q1 24 revenues / EPS were €5.3bn / €3.11 broadly in line with estimates at €5.5bn / €2.91 but bookings missed.
• Bookings refers to firm orders that have been received but not fulfilled and in Q1 24 this came in at €3.6bn compared to expectations of around €5bn.
• A lot of this weakness simply comes from the fact that because ASML sells low numbers of extremely high-priced items, orders and booking numbers can be very lumpy.
• Hence, I don’t think that this miss of expectations is a sign of a sudden collapse in demand, but the problem is that when one’s shares trade at a high multiple of earnings one cannot afford any slip-ups.
• This is why the shares were down around 7% yesterday but I don’t think that this is anything to worry about.
• What concerns me is China which made up a colossal 49% of Q1 24 revenues and where there are increasingly tight restrictions on ASML’s ability to export to that country.
• ASML was clearly reticent to discuss this issue as it did not refer to it at all in the prepared remarks and was not particularly forthcoming when questioned.
• However, a clear divergence of opinion did emerge which is that ASML publicly thinks that all of the demand that it is seeing is coming from the market and not Chinese customers stockpiling everything they can get before they are no longer able to buy the equipment.
• Almost anyone else that you speak to in the semiconductor industry will tell you that China is buying everything it can get its hands on in anticipation of further restrictions from the USA, Japan and The Netherlands.
• This means that demand for equipment is being pulled forward and is in excess of market demand setting the equipment industry up for a correction once Chinese buying slows dramatically.
• There are some signs of that already as ASML did admit that China had fallen to 20% of the order book but that the outlook for 2024 and 2025 remain unchanged.
• Here, ASML is expecting to see a pick-up in demand in 2025 largely as a result of the huge commitments being made by sovereign states in the West to subsidise advanced semiconductor manufacturing outside of Taiwan and Korea.
• Most of the big semiconductor manufacturers have announced support from the USA and others and I suspect that there is more to come.
• ASML is already fully booked for 2024 and so if there is going to be a correction when China stops buying, it is likely to come in 2025.
• The net result is that at 45x 2024 PER and the risk of a miss in 2025, ASML’s shares look too expensive for my taste.
• I would look elsewhere.