ASML Holding NV (XAMS:ASML, Financial), a Netherlands-based supplier of advanced photolithography systems for the semiconductor sector, unveiled its third-quarter financial outcomes on Friday. Though the revenue narrowly missed projections, the bottom line surpassed analysts' forecasts. The company's CEO, Peter Wennink, projects a 30% growth in revenue for 2023.
The financial report elicited a negative response from investors and, as a result, the stock declined.
Yearly revenue growth and analysis
In the face of unfavorable macroeconomic trends, ASML succeeded in raising its revenue by 15%, reaching 6.67 billion euros ($7.06 billion). Nonetheless, this is slightly below the anticipated 6.74 billion euros analysts were anticipating. During the subsequent teleconference, the company's leadership attributed this minor shortfall to the prevailing market low in the ongoing cycle, which is predicted to extend into 2024.
This perspective was further validated by the company's third-quarter order bookings, which totaled 2.6 billion euros. This figure marks a 71% reduction from the same timeframe the previous year, where the value was 8.9 billion euros. Presently, clients have fulfilled their capacity requirements.
For the third quarter, ASML posted a net profit of 4.81 euros per share, denoting a 12% year-over-year increase and surpassing the consensus estimate by 4%. The net income for the quarter constituted 28.4% of the total revenue, markedly surpassing the five-year average of 26%.
From a long-term investment standpoint, ASML's ability to sustain robust profits amid market adversity reaffirms its dominance and significant competitive advantage.
Balancing fiscal discipline with innovation
Concluding the quarter, ASML's financial reserves stood at approximately 5 billion euros, inclusive of liquid assets. This robust financial stance stems from strict cost oversight, particularly given the volatile and challenging macroeconomic landscape.
During the earnings call, Chief Financial Officer Roger Dassen emphasized the company's pronounced focus on cash flow and expenditure prudence. He highlighted management's hesitance in onboarding new employees and a general intent to stabilize costs. Notwithstanding, Dassen pointed out that skimping on innovation would be counterproductive. Reflecting on the figures for the third quarter, research and development expenditures over the past year surged by 21%, amounting to 991 million euros.
ASML's ability to augment earnings while concurrently amplifying its investment in innovation fortifies the confidence in its prosperous trajectory, especially when market circumstances become more propitious.
Chinese market dynamics and regulatory impacts
An examination of third-quarter data reveals that 46% of the revenue was sourced from the Chinese market, indicative of its colossal demand. This figure nearly doubles the preceding quarter's 24% sales contribution from China.
During the teleconference, this stark increase precipitated numerous queries. Enhanced regulatory curbs on chip and semiconductor technology exports to China significantly influenced these discussions, given its consequential effect on ASML's commercial operations.
Projected upward trajectory post-2024
The current financial statement indicates a drop in order bookings to 2.6 billion euros. Given this, and with customers not yet primed for additional investments, the revenue forecast for 2024 aligns with 2023 figures, a suggestion Wennink considers conservative.
During the teleconference, Wennink extensively discussed his optimism for 2025, citing three primary reasons for anticipated significant growth.
First, ASML operates in a sector with inherent growth momentum that is currently experiencing temporary setbacks. Historical data suggests that following such downturns, the recovery is often robust.
Second, clientele feedback indicates an expected surge in chip and semiconductor sales for 2024, with plans to augment production capacities in 2025.
Finally, the blueprint to establish new expansive manufacturing facilities across the U.S., Europe and Asia will inherently escalate demand for ASML's specialized systems.
In consideration of the company's order backlog, 35 billion euros was the recorded figure at the quarter's conclusion. Consequently, ASML's operational bandwidth is not boundless, a fact clients recognize. Wennink anticipates this realization to favorably influence order bookings in 2024, culminating in enhanced revenue for 2025.
Current price levels may serve as a good entry point for long-term investors
ASML's share price has declined nearly 24% since its peak in July. When considering different valuation metrics, the stocks seems to be priced fairly at current levels, perhaps slightly undervalued. For instance, the GF Value Line suggests ASML is around 30% undervalued at current prices.
The discounted cash flow calculator also suggests ASML is fairly priced at current levels with a free cash flow growth rate of 22.8% annually to be achievable.
However, a price-earnings ratio of nearly 30, a FCF yield of 2.57% and an earnings yield of 3.89% (compared to a 10-year Treasury rate of 4.98%), ASML may look pricey.
That said, ASML is a truly unique company with a strong moat and robust tailwinds for the next decade, so it may be worth remembering Charlie Munger (Trades, Portfolio)'s quote: "A great business at a fair price is superior to a fair business at a great price." Hence, current price levels may serve as a good entry point for long-term investors.
