ASML faces bigger problems than China
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Karen Kwok
LONDON, Sept 16 (Reuters Breakingviews) -Clouds are gathering for ASML ASML.AS, though the nearest ones are not necessarily the most threatening. The fear that the U.S. and Dutch governments may curb exports to China has hurt the shares of the 290 billion euro group, whose lithography machines are used to fashion high-precision microchips. But the rapid pace of innovation may be a bigger threat.
The growing trade war is a tolerable headache for ASML CEO Christophe Fouquet. In the second quarter Chinese sales accounted for a whopping 49% of the group’s total. Yet that may be because Middle Kingdom customers are hurriedly bringing forward sales. Redburn analysts estimate that a further curb in exports could cut annual revenue by just 1.1 billion euros – equivalent to 3% of ASML’s total estimated revenue in 2025, using data polled by Visible Alpha.
That’s a manageable blow given the Veldhoven-based group is expected to record sales growth of over 30% that same year. It’s helped by a dominant position in lithography machines, whose ultra-fine lasers are used to cut microchips and the transistors that process information by turning currents on and off. Lithography made up 23% of the $114 billion global chip equipment market in 2023, according to Boston Consulting Group and Gartner.
For decades, chip companies like TSMC 2330.TW and Intel INTC.O have sought to pack ever more circuits on to their devices, creating steadily increasing demand for ASML’s lithography machines. Yet the growth of artificial intelligence, and the ravenous need for both chips and energy it creates, may signal a shift: rather than cram more circuits on to a semiconductor, it may be cheaper, and less energy-intensive, to find more efficient ways of stacking chips close to each other, dubbed advanced packaging.
Advanced packaging accounts for just 8% of the global chip industry today, but will double to $96 billion by 2040, BCG reckons. That may mean that customers will still use ASML’s kit, but have less need for the most expensive lithography technology, like the most advanced extreme ultraviolet machines, which create beams as thin as 2 billionths of a metre, and currently cost up to 350 million euros each. EUV machines will make up 36% of ASML sales in 2024, and are expected to account for 51% by 2028, according to analysts’ estimate polled by Visible Alpha.
ASML’s current valuation doesn’t leave much room for error. Fouquet’s group trades at some 39 times the earnings analysts expect it to generate this year, using Visible Alpha data. That’s nearly double the multiple of peers Lam Research LRCX.O and Applied Materials AMAT.O. To hang on to its premium valuation, ASML will need laser-like precision.
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CONTEXT NEWS
The Dutch government on Sept. 10 said that ASML will need a licence to provide spare parts and software updates for computer chipmaking equipment it has previously sold to Chinese customers, which now falls under export restrictions.
ASML, which said on Sept. 6 it did not expect the change to impact its earnings, declined to comment.
ASML will release its third-quarter earnings report on Oct. 15. It is expected to outline its long-term forecasts during an investor day on Nov. 14.
Shares of ASML have dropped 26% since July 15.
Graphic: ASML underperforms the broader semiconductor index https://reut.rs/3ZtbjGi
Editing by Neil Unmack and Oliver Taslic
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