ASML shares rise ahead of quarterly earnings report

Shares of ASML increased by 2.8% on Monday, in advance of its third-quarter earnings report, due on Wednesday.

This rise followed a broader rally in artificial intelligence-related stocks, signalling optimism from investors about the sustained demand for AI chips.

According to forecasts from several research firms, the Dutch chip equipment maker is expected to report solid revenue growth and bookings.

However, ASML has underperformed compared to its global peers this year, largely due to concerns over China, Intel, and memory chip demand.

These factors led some institutions, such as Morgan Stanley and UBS, to downgrade the stock. ASML’s shares are up 16% year-to-date, in contrast to the 32% rise in Applied Materials and the 89% surge in Taiwan Semiconductor Manufacturing Co. (TSMC).

Some analysts believe that shares in Europe’s largest tech company are undervalued, considering its pivotal role in the AI chip supply chain. Below are key metrics to watch in ASML’s upcoming earnings results.

ASML expected to report strong growth

ASML’s primary product is Extreme Ultraviolet Lithography (EUV) technology, which is essential in manufacturing microchips.

EUV lithography allows for the production of smaller, more powerful, and energy-efficient chips, and its sales are expected to grow further due to strong demand for advanced AI chips in the third quarter.

According to Visible Alpha, ASML is forecast to report bookings of €5.59bn in the third quarter, more than double the figure from the same quarter last year, though flat compared to the second quarter.

EUV products are expected to contribute €2.82bn in orders. Revenue is forecast to reach €7.12bn, representing a 6.7% increase year-on-year. The gross margin is expected to be 50.8%, slightly lower than the 51.9% reported previously.

These forecasts align with the upper end of ASML’s guidance, which included net sales estimates of between €6.7bn and €7.3bn, with a gross margin ranging from 50% to 51%.

These figures suggest ASML will return to growth after two consecutive quarters of decline. ASML has a strong track record of exceeding estimates, with the exception of 2019.

Therefore, another earnings beat would bolster confidence in the company’s growth trajectory. However, the outlook for the fourth quarter and the full year will play a crucial role in determining the future direction of ASML’s share price.

During the second-quarter earnings call, CEO Christophe Fouquet described 2024 as a “transition” year, and he expects the semiconductor industry to continue its recovery in the second half of the year.

He stated, “We currently see strong developments in AI, driving most of the industry’s recovery and growth, ahead of other market segments… The industry expects to be in a cyclical upturn in 2025. As a result, we need to prepare for a number of new fabs being built today across the globe.”

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Downside risks

There are several concerns regarding ASML’s future growth. US restrictions on chip exports to China may continue to affect the outlook for AI demand, compounded by slower economic growth in China, the world’s second-largest economy.

China accounted for 49% of ASML’s total sales in the first half of the year, up from 39% in the final quarter of 2023.

Sales in China could be impacted by US export restrictions aimed at limiting China’s technological advancements for military purposes, framed as “national security” measures.

Last month, the Dutch government, in collaboration with the US, imposed further restrictions on ASML’s chip exports to China. Under the new policy, ASML must obtain a licence to provide spare parts and software updates for chip-making equipment sold to China.

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Analysts have also pointed out that demand in China may weaken due to overcapacity issues with ASML’s less advanced AI chips.

Additionally, Intel has paused its plans to expand in Germany for two years as part of its cost-cutting measures, which could negatively impact ASML’s sales revenue.

However, this may be offset by strong demand from ASML’s largest customer, TSMC. Analysts at Jeffries believe TSMC could be the largest driver of ASML’s EUV sales in the third quarter.

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