ASML — which sells the kit required to make the very best sort of semiconductors — seems to be walking on water. In an industry buffeted by recession fears and the US-China chip fight, its machines are selling better than expected and it has more orders than it can handle. What’s going on?
The answer is that ASML, with a €161bn market value, leads the pack in what remains — despite cyclical headwinds — a growth industry. If we really are to live in a world in which fridges order milk, cars drive themselves and computers write newspaper articles, that requires a lot of processing power.
ASML’s new extreme ultraviolet (EUV) lithography units are mission critical for ambitious chipmakers. They use tiny wavelengths to print more powerful chips. No one else makes them — yet. And there aren’t enough of them to go round. Pricing power would explain why its operating margins touched a record high of 35 per cent last year, and why analysts forecast these to stay high into 2024.
This advantage will shield ASML from cyclical and geopolitical headwinds, for some time at least. Customers exposed to softening demand may push their orders back. But there are lots more waiting in the queue. Meanwhile, the company reckons it will suffer little direct effect from US measures against China, as ASML is a European manufacturer.
However, indirect impacts from the softening of Chinese demand are a bigger concern, with 15% of third-quarter sales coming from the country. But here, too, its €33bn order backlog lasting into 2024 should cushion the blow.
ASML cannot diverge from broader market forces forever. The stock market clearly has its doubts given that it has marked down ASML stock around 40% since the start of the year, broadly in line with the global chip sector. Given ASML’s industrial position, that suggests that investors see this latest downturn for semiconductors as something more than a dip.
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