Demand for machines used to build computer chips is likely to increase due to the boom in demand for generative artificial intelligence.
One company, Netherlands-based ASML, is the world’s dominant supplier of these extreme ultraviolet (also known as EUV) lithography machines — which “are required to manufacture the most advanced chips,” noted CNBC.
ASML’s machines are expensive and take a long time to build. “Sporting a price tag of over $300 million each, in November 2023, buyers faced a two-year wait once they placed an order,” according to my new book, Brain Rush.
ASML’s second quarter 2024 results beat expectations due to demand for AI chips. Nevertheless, ASML shares fell 11.4% on fear more export curbs could reduce the company’s revenue from China, reported Barron’s.
The drop in ASML shares could represent a buying opportunity as demand for the company’s product rises in in 2025 and beyond.
ASML’s Second Quarter 2024 Results
ASML’s stock had risen 49% in 2024 as of July 16, yet the company’s shares fell. One reason for the drop could be reporting results on July 17 that beat expectations but featured guidance for the upcoming quarter that fell short of analysts’ forecasts.
Here are the key numbers:
- Q2 2024 net sales: $6.8 billion — down 9.5% but $1.3 billion ahead of expectations, according to the London Stock Exchange Group.
- Q2 2024 net profit: $1.45 billion — down 18.7% but $130 million more than expected, noted LSEG.
- Q2 2024 net bookings: $5.2 billion — 24% more than the previous year, CNBC reported.
- Q3 2024 net sales forecast: $6.44 billion at the range midpoint — $550 million below analysts’ expectations, according to CNBC.
ASML expressed optimism about the company’s future. “We currently see strong developments in AI, driving most of the industry recovery and growth, ahead of other market segments,” ASML CEO Christophe Fouquet said in a statement.
Nevertheless, worries about the future persist. “While there are still uncertainties in the market, primarily driven by the macro environment, we expect industry recovery to continue in the second half of the year,” Fouquet said.
“We see 2024 as a transition year with continued investments in both capacity ramp and technology. We currently see strong developments in AI, driving most of the industry recovery and growth, ahead of other market segments,” he added.
“EUV orders increased substantially” in the quarter, Mihuzo Securities analyst Kevin Wang told Reuters. “We attribute this to strong orders from TSMC and Intel.”
ASML has been under government pressure — from the U.S. and the Netherlands — to restrict exports of its latest EUV machines to China.
The company said such restrictions would “impact 10% to 15% of it’s China sales this year,” CNBC reported. In the second quarter of 2024, 49% of ASML’s business came from exporting its older equipment to China, according to Reuters.
Prospects For ASML’s Stock Price
ASML stock is slightly under-valued according to Wall Street analysts. Based on three analysts offering 12-month price targets for ASML Holding, the stock would need to rise 2.3% to reach the average of $1,092.50, noted TipRanks.
Demand for EUVs could pick up in 2025 — thus resulting in faster than anticipated growth in ASML revenues.
Last year, Jeffries forecast strong demand from TSMC driven by growth in AI.
Specifically, TSMC was anticipated to use ASML machines to build 5 nanometer and 3 nanometer parts “to power machine learning and AI training and inference workloads,” noted Brain Rush. Jeffries estimated ASML’s revenue growth would average 21% between 2022 and 2025.
ASML confirmed such demand from TSMC and Samsung. “The industry expects to be in a cyclical upturn in 2025,” Fouquet said in a pre-recorded video addressing the company’s Q2 2024 earnings, reported CNBC.
“As a result, we need to prepare for a number of new fabs that are being built today across the globe. Those fabs will be spread geographically and are strategic for all our customers. They are all scheduled to take our systems,” he added.
Another analyst expects AI to account for a growing share of ASML’s revenues. AI is a “relatively small part” of ASML’s revenues, Quilter Cheviot technology analyst Ben Barringer, told CNBC. “But that’s going to grow very significantly over the next little while,” added Barringer.
Will The U.S. Protect Taiwan?
The upcoming presidential election could make things more difficult for ASML.
If President Joe Biden wins a second term, export restrictions on ASML could increase. “The Biden administration is said to be considering implementing more restrictions on ASML Holding that would prevent it from selling equipment to China,” noted Bloomberg.
If former president Donald Trump wins a second term, Taiwan may not receive U.S. military protection from an invasion by China, “I think, Taiwan should pay us for defense,” Trump said in an interview with Bloomberg Businessweek. “You know, we’re no different than an insurance company. Taiwan doesn’t give us anything,” he added.
Whether a killer app, which I discussed in a July Forbes post, emerges for generative AI is likely to be more important for ASML’s future than the U.S. election results.
That’s because demand for GPUs will flatten — along with the urge to buy ASML’s machines — unless companies find a way to make their investments in generative AI pay off.
Read the full article here