ASML 24Q2 Preview: Expected Lack of Performance Growth Drivers, What Is the Investment Outlook?
$ASML Holding (ASML.US)$ is a leading supplier of lithography systems used in semiconductor manufacturing, holding a significant position in the semiconductor industry. ASML will announce its financial data for the second quarter of 2024 on July 17, Eastern Time. Although its stock price has performed strongly since the end of 2022, with an increase of 52%, factors such as insufficient performance growth momentum and high valuation levels may cause the stock price to pull back after the earnings report is released.
According to Bloomberg consensus expectations, ASML's revenue for Q2 2024 is expected to be $6.508 billion, YoY -13.38%; net profit is expected to be $1.328 billion, YoY -26.28%; adjusted EPS is expected to be $4.04, YoY -24.69%.
Key Focus Points of Q2 Earnings Report: Order Volume and Capacity Changes
Lithography systems are one of the most critical pieces of equipment in the chip manufacturing process, and ASML is currently the sole supplier of the most advanced, highest-specification extreme ultraviolet (EUV) lithography machines. Additionally, ASML provides deep ultraviolet (DUV) lithography systems, metrology and inspection systems, computational lithography software, and related services to chip manufacturers for mass production on silicon wafers. It is important to note that ASML does not directly manufacture chips but supplies chip manufacturing equipment. Major customers (such as $Taiwan Semiconductor (TSM.US)$ and $Intel (INTC.US)$) place orders for lithography equipment in advance, and the order volume and corresponding payment timing significantly affect ASML's financial data.
While ASML is not the only manufacturer of lithography machines, it holds over 80% of the market share and maintains high technological barriers through continuous R&D investment. This makes it nearly impossible for major competitors like $Nikon (7731.JP)$ and $Canon (7751.JP)$ to challenge ASML's market position in the short term.
In terms of revenue structure, in the fiscal year 2023, 79.6% of ASML's revenue came from the supply of lithography machines, while approximately 20.4% came from online/offline related services for lithography machines.
Expected Decline in Q2 Orders May Negatively Impact Performance
Consistent with Q1 2024, the company’s orders for Q2 are expected to continue facing a YoY decline. The main reasons include the difficulty in sustaining demand for new products from major customers, and the continuation of U.S. trade restrictions on China from Q1 to Q2, putting significant pressure on the company's Q2 sales and profits. Although AI demand remains strong, most orders were paid for in 2023, and the performance has not been reflected in the 2024 financial statements, while new orders have not shown significant drivers. According to Bloomberg consensus expectations, the total order value for Q2 2024 is $4.83 billion, YoY -1.33%.
The decline in order volume may be caused by the following reasons:
Concerns from core customers about the cost of new lithography models: If older EUV lithography machines can adequately meet the current needs of TSMC, Intel, or other foundries, using higher-spec machines in the short term may pose yield challenges for these major customers. Since TSMC recently stated that its upcoming A16 chip does not require ASML's latest EUV equipment for production, it can be expected that the latest EUV equipment will face low order volumes in the short term. According to Bloomberg consensus analysis, EUV lithography machines are expected to face a 3.06% YoY decline in sales in Q2 2024.
U.S. trade restrictions on China's purchase of lithography machines: On January 1, 2024, ASML, under pressure from the U.S., partially revoked sales certificates for two of its products to China; on April 4, the revised terms took effect, further restricting ASML's product sales to China. Given that China is an important customer for ASML (contributing about 26% of revenue in fiscal year 2023, second only to 29% from Taiwan), these trade restrictions may also impact ASML's financial data.
Capacity Constraints Expected to Limit Q2 Performance
In addition to facing a short-term decline in order volume, capacity constraints are also a significant factor limiting ASML's performance.
In 2024, ASML still needs to handle the backlog of lithography machine orders accumulated over the years, and the orders placed in 2024 have already exceeded ASML's annual capacity. Therefore, capacity is a long-term factor affecting ASML's fundamental development.
Even so, ASML's expected capacity increase target completion time is 2025/26, indicating that the supply of the company's products in 2024 may not see significant growth.
Decline in Operating Profit, Expected Decrease in Q2 EPS
Due to a decrease in order volume, the company's unit production costs have risen due to the impact of economies of scale, leading to a decline in the company's gross profit margin to 50.5%. The company's operating expenses are well controlled, with marketing and R&D expenses expected to see only a slight increase. However, due to the drop in sales, the company's profit is expected to decline. According to Bloomberg consensus expectations, ASML's operating profit margin for Q2 2024 is approximately 27.7%, YoY -15.6%; net profit margin is approximately 24.9%, YoY -14.9%. Adjusted EPS is expected to be $4.04, YoY -24.7%.
In terms of inventory, the company's inventory is at a higher level compared with the same period in 2023, but it has decreased compared with 2024Q1. Bloomberg consensus estimates show that the inventory turnover days in 2024Q2 is 291.7 days, YoY +42.33%, indicating that the company's order demand has slowed down compared with the same period last year, and the inventory backlog time has increased.
How can we plan our investment strategy for ASML?
ASML's long-term outlook remains positive. The company holds a monopoly in EUV lithography technology, and its major customers like TSMC and Intel are still actively investing to meet growing market demand. With the continued expansion of the AI and cloud computing markets, ASML is expected to continue to benefit.
In terms of shareholder returns, ASML's dividend yield TTM is 0.62%, which is relatively low. Additionally, ASML's most recent stock buyback decision was announced in 2022, with a stock buyback rate of 0.30% in 2023, making it difficult for investors to expect returns from stock buybacks.
Due to the company's low shareholder returns and relatively low margin of safety, the stock price's driving force relies entirely on performance growth. Once the company's growth rate slows, the valuation will significantly decrease, causing a noticeable impact on the stock price.
Due to a series of short-term negative factors such as slowing order demand and capacity constraints, ASML's Q2 performance is expected to decline, making short-term stock price volatility less optimistic. According to Bloomberg consensus expectations, ASML's revenue for Q2 2024 is expected to be $6.508 billion, YoY -13.38%; adjusted EPS is expected to be $4.04, YoY -24.7%. After the earnings release, the stock price is expected to experience a short-term pullback.
Then, what investment strategies can investors adopt for ASML?
Investors holding the stock may consider protective puts to hedge against downside risk or sell high-strike call options to increase income.
Investors not holding the stock might consider buying put options. Additionally, they can wait for the pullback to end before buying the stock to profit.
Furthermore, investors should pay attention to the company's conference call after the earnings release, where the announcement of future orders and performance guidance will have a significant impact on the stock price.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
Read more
Comment
Sign in to post a comment
