ASML’s Chip-Making Empire Faces a Slowdown
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ASML Holding NV (ASML) is the unsung hero of your smartphone. Without their machines, the tiny chips powering our digital world wouldn’t exist. But now, this Dutch tech giant faces headwinds. In an embarrassing mishap, ASML accidentally released its Q3 2024 earnings a day early. The numbers looked solid, but the outlook raised eyebrows. The company slashed its 2025 revenue forecast, signaling a potential slowdown in the chip industry’s breakneck growth. This news caught the attention of both institutional and retail investors, according to our TrackStar data. Search volume for ASML spiked as market participants scrambled to understand the implications. The root cause? A perfect storm of geopolitics, shifting demand, and technological transitions. So, is ASML’s stumble a buying opportunity, or a sign of deeper troubles in the semiconductor industry? Let’s dive in and unpack what’s really going on with this critical player in the global tech ecosystem. ASML’s Business ASML’s extreme ultraviolet (EUV) lithography systems are the crown jewels of the semiconductor industry. These massive, precision instruments – each costing over $150 million – enable chipmakers to create ever-smaller, more powerful processors. It’s like having a printer that can write the entire Bible on a grain of rice. |
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ASML’s business breaks down into two main segments:
In a rare fumble, ASML accidentally released its Q3 2024 earnings a day early. Despite the snafu, the numbers impressed: €7.5 billion in sales and €2.1 billion in profit. But the real story lies in what comes next. ASML just hit the brakes on its 2025 outlook. Revenue expectations dropped from €30-40 billion to €30-35 billion. Why? The chip world is facing a speed bump. While AI chips are still red hot, demand for other semiconductors is cooling off. Some big customers are delaying factory upgrades, and memory makers are tightening their belts. Adding to the drama, ASML expects its China business to shrink from a whopping 49% of sales to just 20% next year. Blame tighter export controls from the Dutch government, aimed at keeping cutting-edge chip tech out of Chinese hands. Financials
Source: Stock Analysis ASML’s been on a rocket ride, with revenue soaring 22% annually from 2016 to 2023. But, recent numbers show a slight dip, hinting at turbulence in chip land. Why the sudden slowdown? Blame it on a tech hangover. The post-pandemic gadget buying spree is over, and even AI can’t pick up all the slack. Despite the bumps, ASML’s profit machine keeps humming. Gross margins are rock-solid around 50-52%, while operating margins have beefed up from 25.6% to 30.7% since 2016. Here’s where it gets interesting: ASML’s crystal ball for 2025 is cloudier than expected. They’ve trimmed their revenue outlook from €30-40 billion to €30-35 billion. What gives? Two words: China and caution. New export rules are putting the brakes on ASML’s China business. Meanwhile, some big chip makers are hitting the pause button on factory upgrades. It’s like the whole industry is taking a breather. Cash flow’s been a wild ride. It peaked at a whopping €9.9 billion in 2022 but has since come back down to earth. Why? ASML is betting big on the future, pouring money into R&D and beefing up inventory for its next-gen machines. Speaking of R&D, ASML has quadrupled its brain trust investment since 2016, now spending €4.2 billion annually to stay ahead of the pack. The good news for investors? ASML’s dividend has been growing like a weed, up nearly 24.6% annually since 2016. They’re sharing the wealth, even in choppy waters. ASML is facing some headwinds, but it’s not exactly in trouble. It has a fortress-like balance sheet, a monopoly on the most advanced chip-making tech, and is investing heavily in the future. Valuation
Source: Seeking Alpha ASML isn’t exactly a cheap stock. With substantial growth, the company has been valued at 39.7x TTM earnings and 36.0x forward earnings. That puts it above companies like KLA Corp. (KLAC), ACM Research (ACMR), and Applied Materials (AMAT). While ASML is cheaper than Enphase Energy (ENPH) on a P/E basis, it’s more expensive than all the others on this list on a price-to-cash flow basis. However, the cash flows can vary substantially based on changes in accounts payable and receivable as well as income taxes. Growth
Source: Seeking Alpha Post-covid, ASML’s revenue growth has been remarkable. It was only this past year that things finally slowed. And the outlook, although trimmed, still calls for substantial growth. While the company has been able to extend these gains to its P&L, it doesn’t always translate to increases in free cash flow, which has fallen for ASML from €9.9 to €2.8 billion, largely driven by changes in the accounts receivable, payable, inventories, and income taxes as we noted earlier. Profitability
Source: Seeking Alpha ASML shines when it comes to overall profitability. While KLA Corp. comes in hot with its EBIT and free-cash-flow margins, ASML’s net income margin is only slightly lower, yet still quite respectable. Our Opinion 8/10 Normally, we wouldn’t rate a company so high, given its financial performance. However, ASML dominates the semiconductor manufacturing equipment space. Literally, no one can touch them. And the barriers to entry would take a competitor years to catch up, if ever. For this reason, we’d be willing to pay a premium for this company that we otherwise wouldn’t for other companies. |
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