ASML, chip boom supports business. China risk on revenues

However, as is always the case, a single financial year - or quarter - tells part of the story. It is therefore necessary to look, for example, at the last five years. In this time span, one can see the gradual climb in revenues and profitability. In 2019, the year before Covid, the top line of the income statement was worth EUR 11.82 billion. In 2020, it rose to 13.97 billion and, in 2022, to 21.173 billion. Net profit, for its part, was 2.6 billion five years ago and, last year, stood at 7.839 billion. The same ratio of net profitability to turnover started from 21.9 per cent to reach 28.4 per cent in 2023. Of course: the dynamics are influenced by non-recurring items and special events related to each individual financial year. And yet, the expansion of the business is in the numbers.

All as easy as drinking a glass of water, then? The reality is more complicated. The United States, in October 2023, introduced further restrictions on the export of chip machines to China. The Dutch government itself, predictably subject to moral suasion by Washington, has set export limits. This has an impact on ASML's accounts. In 2023, the former Middle Kingdom is worth 29% of consolidated company turnover. True! Beijing's weight in 2022 was lower (14%). Thus, it can be said that the bans imposed had little impact on ASML. That being said, however, the situation requires a more detailed analysis. Firstly last year's sales in China refer - to a large extent - to orders that were already in place at the end of 2022. On these, the effect of the bans was evidently not felt very much. Moreover, several of the machines sold relate to mature production activities. That is to say: these were not cutting-edge technologies in the sights of the US and Dutch governments.

Beyond such evaluations, however, it is clear that many frontier products - those with the highest margins - cannot be exported to China. An example? The most advanced immersion photolithography solutions, which - with distilled water between the last element of the lens of the lithography machine and the wafer itself - make the chip realisation more sophisticated. This is a non-sale which - according to ASML - is expected to mean a drop in revenue in the former Middle Kingdom of 10-15%.

Not only that. Another element to consider is the geographical breakdown of revenues. At the end of 2023, the breakdown of turnover is as follows: China, in fact, generates 29% of sales; Japan and the Rest of Asia account for 2 and 3% of turnover respectively. The USA is responsible for 10% revenue (4% for the Emea). The remaining 30% is made in Taiwan. In other words: the island of Formosa, with the giant TSMC, is the Dutch multinational's first geographical market.

The condition, of course, wrinkles the nose. True! Taiwan is, together with Silicon Valley, one of the world centres of the chip value chain. Consequently, on the one hand, the scenario is not surprising; and on the other, any escalation between the West and Beijing for control of Formosa would impact the entire semiconductor industry. Having said that, however, the market does not seem to believe too much in the escalation of the issue and therefore - according to several experts - the problem is not priced in. A condition that the do-it-yourself investor should definitely take into account.

So far, some suggestions on market risks and income statement dynamics. One relevant aspect, however, is technology. In 2023, investments in R&D amounted to 3.98 billion. That is: 14.2 per cent of revenues. This percentage - somewhat lower than the average of the last five years - is nevertheless indicative of the focus on research. Proof of this can be found, moreover, in the division of turnover by technology: in 2023, on the one hand, the so-called ArFi (immersive frontier photolithography) is worth 41% (it was 34% in 2022); on the other hand, Euv (extreme ultraviolet light photolithography) is 42% (46% the year before). In short: hyper-sophisticated machinery sustains business, also thanks to the rise in the average price in Euv. A boost that will continue in 2024? ASML says that although the equipment market is recovering, the current year will be transitional (revenues in line with 2023 and gross margin slightly lower). In particular: gross margin will also be held back by heavy investments in the production base. Disbursements which will pay off in 2025. It is in that year that the company estimates the acceleration of the business. The gross margin, again in 2025, is expected to be between 54% and 56%. More immediately, however, what are the forecasts? In the first quarter of 2024, sales are estimated between 5 and 5.5 billion, with the gross margin between 48 and 49%.

Against this background, ASML's stock on the stock exchange has risen more than 30% since the beginning of the year. Over the 12 months, the result remains positive: +51%. On closer inspection, such performance has led the company to an estimated P/e of 45.3 (26/2/2024) in 2024. This is a higher price/earnings per share ratio than the 2023 figure (33 times), but within the range of the indicator for the last ten years. Here the maximum is 49.2 (2021) and the minimum 22.5 (2018).

Further reading

Stock performance.