- Q1 revenue misses by €100 million
- Chip kit firm’s stock falls more than 4%
- Underlying market remains supportive
Chip stocks have been gunning it this year thanks to booming demand for the most advanced AI (artificial intelligence) technology. The US SOX semiconductor index, which measures the world’s meaningful chips stocks, has rallied 15% since the start of January, so ASML’s (ASML:AMS) revenue miss has got investors worried.
The Dutch tech firm dominates the market for lithography systems, machines which can cost hundreds of millions of dollars each and use light beams to help create microscopic circuitry, crucial for chip manufacturing, making the company something of a sector bellwether.
HOW BAD WAS THE SALES MISS?
ASML reported net sales of €5.29 billion, missing first quarter 2024 consensus pitched at €5.39 billion, but is this something to worry about? Notably, net bookings for ASML’s equipment, a key indicator of future revenue, stood at €3.61 billion for Q1, marking a 4% decrease year-on-year and a substantial drop from the previous quarter, significantly missing the consensus estimate of €4.63 billion.
The shortfall sounds worse than it is given the sheer size of single-kit sales. ‘Although disappointing we would not read too much into it as order intake is notoriously lumpy’, said ING analyst Marc Hesselink.
‘ASML’s equipment is very expensive and it’s common to see swings in sales on a quarterly basis as it is a highly-considered purchase and not a low-price, high-volume product which is constantly ordered’, chimed AJ Bell’s investment director Russ Mould.
Since the market should understand this, it could be argued today’s rough 4% share price decline to €878.90 is a little harsh.
UNDERLYING MARKET DYNAMICS
Two things back this up. First, management gave no indication Q1 has upset the 2024 full-year apple cart, quite the opposite.
‘Our outlook for the full-year 2024 is unchanged, with the second half of the year expected to be stronger than the first half, in line with the industry’s continued recovery from the downturn’, said Peter Wennink, ASML’s chief executive.
In fact, Wennink sees demand strengthening as the months tick by, aided by new chip plants planned with support from governments in Taiwan, South Korea, Japan, China and the US, which will all need fitting out with ASML high-performance kit.
‘We see 2024 as a transition year with continued investments in both capacity ramp and technology, to be ready for the turn in the cycle’, Wennink told investors.
The second factor is also crucial – China. Hamstrung by ongoing tech tensions with Washington, Chinese chipmakers are flocking to buy older ASML equipment that does not face export restrictions, needed to make chips that go into products from refrigerators and automobiles to toys and smartphones, all part of Beijing’s multi-year programme to reduce its dependence on imported chips.
According to industry group SEMI, China is adding the most chipmaking capacity in 2024, followed by Taiwan and South Korea, reported Reuters.
THINKING RATIONALLY
These points should provide succour to investment markets and cap any panic that ASML’s sales are a meaningful pointer for the rest of the industry, with hot stocks like Nvidia (NVDA:NASDAQ) and Advanced Micro Devices (AMD:NASDAQ) set to report themselves over the coming weeks.
‘While the latest results have spooked the market, ASML insists its full year outlook is unchanged and it is sticking with the belief that the chip industry will improve as 2024 progresses’, said AJ Bell’s Mould. ‘There is some reassurance in that statement but expect investors to be more nervous towards the stock until it next reports, for fear of repeat setbacks.”
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Steven Frazer) and the editor of the article (Ian Conway) own shares in AJ Bell.
