Investors Await Earnings Report
After a turbulent summer, investors in ASML Holding NV are hoping that the upcoming earnings report will highlight the chip equipment maker’s potential as a leader in the artificial intelligence (AI) sector.
Shares of Europe’s most valuable technology company have fallen approximately 20% since reaching a high in July. This decline is attributed to fears of stricter U.S. restrictions on ASML’s operations in China and a broader rotation out of the tech sector this summer. These issues have overshadowed strong orders for ASML’s machines, ending an AI-driven rally that saw the stock nearly double in value since the beginning of 2023.
Analyst Expectations for Orders
“We are expecting healthy orders,” said Jefferies analyst Janardan Menon. He anticipates that orders from Taiwan Semiconductor Manufacturing Company (TSMC) will rise and that the situation in China will stabilize. Menon predicts bookings will exceed the previous quarter’s €5.57 billion ($6.1 billion) figure. ASML is set to announce its third-quarter results before the European market opens on Wednesday.
“If they report those kinds of orders, I think the stock should do okay,” Menon added.
Valuation and Market Comparison
A positive report would be welcomed, especially as ASML shares are currently trading at about 30 times forward earnings. This valuation is lower than its five-year average and significantly below AI-driven stocks like Nvidia, which trades at 37 times earnings. However, ASML’s valuation is still higher than many other chip equipment makers, according to Bloomberg data. The company has a monopoly on producing the machines needed for advanced chip manufacturing, with TSMC and Intel among its largest customers.
Focus on China Orders
Orders from China will be a key focus in the earnings report. The stock dropped in July after Bloomberg reported that the U.S. might impose severe trade restrictions if the Netherlands did not limit ASML’s ability to service certain equipment in China. Following this, the Dutch government planned to restrict ASML’s capacity to repair its advanced machines in the country, as reported by Bloomberg.
Despite these challenges, export controls have led to an increase in orders from China, which has been purchasing older, unrestricted equipment to produce more mature semiconductors. China has accounted for nearly half of ASML’s revenue in recent quarters. However, some analysts believe this figure may decline, potentially pressuring the stock in the future.
UBS analyst Francois-Xavier Bouvignies predicts that ASML could lose nearly 25% of its sales in China next year, with 45% of its overall revenue at risk due to further restrictions. He views earnings growth from AI as a short-term positive but warns that issues with China may weigh on the stock in the long term. Bouvignies recently downgraded ASML, citing overhyped earnings growth potential from AI.
Geopolitical Factors and Market Sentiment
With the U.S. election approaching, geopolitical concerns have become less prominent as investors await information about the next administration’s plans. However, there are signs that the AI boom in the semiconductor sector remains strong. TSMC recently reported better-than-expected revenue, while shares of other AI-related companies like Nvidia have rebounded after their summer declines.
For ASML, options data indicates an implied one-day price move of approximately 5.5% following the earnings report.
Analyst Outlook
Despite recent declines, Wall Street remains generally positive about ASML. The majority of analysts tracked by Bloomberg rate the stock as a buy, with the average price target suggesting a potential 24% upside over the next 12 months.
In addition to the earnings results, ASML’s investor day in November will provide an opportunity for the company to reassure investors regarding its orders and position in China.
Jefferies’ Menon expects ASML to raise its guidance during the investor day, noting that while there have been concerns about delayed orders from Intel, “we have not heard of any pushout from any company anywhere in the world.”
ASML’s current long-term guidance forecasts sales of between €30 billion and €40 billion by 2025, with expected revenue of €44 billion to €60 billion by 2030.
Citi analyst Andrew Gardiner also anticipates a boost in ASML’s stock, expecting the company to reiterate its confidence in 2025, driven by long-term opportunities in AI. “Investor sentiment soured over the summer regarding the 2025 outlook and demand beyond,” Gardiner stated. He believes the upcoming results and investor day will likely serve as positive catalysts for the stock.
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