Shares of ASML Holding (NASDAQ: ASML) plunged after the maker of semiconductor equipment lowered guidance and said that recovery in some chip markets would extend into 2025. The drop pushed the stock into negative territory on the year.
The stock came under pressure earlier this year after the U.S. government announced it was looking to implement more strict trade restrictions on companies that sell advanced technology to China, which extended beyond U.S. companies to firms that do a lot of business in the U.S. In September, the Netherlands adopted its own export controls related to ASML's semiconductor equipment, requiring a license from the Dutch government to export some equipment.
Against that backdrop, let's take a closer look at ASML's Q3 results and see if this is a good time to buy the stock on the dip.
China in focus
ASML has long described 2024 as a transition year. This was for two main reasons. One is that despite the strength of chips being used as part of the artificial intelligence (AI) infrastructure buildout, there have been a number of areas in the semiconductor industry that are going through difficult periods. This is quite evident when digging into the results of a more broad-based chipmaker such as Broadcom, where it has seen revenue declines in areas outside of AI. At the same time, the company was just beginning to ship its newest technology, a high numerical aperture extreme ultraviolet lithography system, or High NA EUV, and expected that to start to gain traction next year.
Next year was supposed to be a stronger year for the company, but ASML warned that areas outside of AI were taking longer than expected to recover, which likely would extend into next year. It also mentioned a delay in the timing of EUV demand.
This need for caution could be seen in the company's Q3 bookings, which are new orders for which contracts have been signed, and are often an indication of future growth. The company had 2.6 billion euros ($2.8 billion) in bookings for the quarter, which was unchanged from a year ago and a 53% decline from the 5.6 billion euros ($6.1 billion) in bookings a quarter ago.
For the third quarter, ASML's revenue rose nearly 12% year over year to 7.5 billion euros ($8.2 billion) and came above the company's guidance range of 6.7 billion euros ($7.3 billion) to 7.3 billion euros ($7.9 billion). Its equipment sales rose 11% year over year to 5.9 billion euros ($6.4 billion), while its service revenue increased 7% to 1.5 billion euros ($1.6 billion).
ASML sold 106 new lithography systems and 10 used systems in Q3 compared to 105 new and seven used systems in the prior-year period. In Q2, it sold 89 new lithography systems and 11 used systems.
Looking ahead, the company forecast Q4 sales of between 8.8 billion euros ($9.6 billion) and 9.2 billion euros ($10 billion), which would represent solid growth from the 7.2 billion euros in sales it produced a year ago. For 2025, ASML predicted that its 2025 sales would come in at a range of 30 billion euros ($32.6 billion) to 35 billion euros ($38.1 billion), which would be at the low end of the range it forecast at its 2022 investor day. Gross margins, meanwhile, are expected to be between 51% and 53%, below its prior outlook.
While ASML doesn't sell its higher-end EUV systems to China, part of the problem for the semiconductor equipment maker appears to be that Chinese companies rushed to buy its older deep ultraviolet lithography (DUV) machines ahead of expected export restrictions. China made up 47% of its sales in Q3 and 49% in both Q1 and Q2 of this year. That compares to 29% in 2023 and only 14% in 2022. For 2025, sales to China are also expected to move back to around 20%.
Image source: Getty Images.
Is this a buying opportunity?
ASML saw a pull-forward demand in China this year due to trade restrictions, and that business will go back to a more normal level. As such, I do not think China is the main issue facing the company. The company can have a lumpy business, and this is just part of that lumpiness.
I think the bigger issues are continued softness in the more commoditized part of the chip market, as well as the reception of its new technology. Intel was the first company to embrace and take shipments of ASML's newest system, but Intel's foundry business struggled and it has started to cut costs at the unit. Meanwhile, it is believed that Samsung has also pulled back on orders. That leaves Taiwan Semiconductor Manufacturing. While it has taken shipment of the new system, it has also said that the new system is too expensive and that it can make advanced chips without it.
ASML trades at a forward price-to-earnings multiple of about 22 based on 2025 estimates, which is toward the low end of where it has traded in recent years.
ASML PE Ratio (Forward 1y) data by YCharts
I think ASML should be fine in the long run, but I think the pull-forward in Chinese demand along with the struggles at Intel's foundry business are likely to be headwinds into next year.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
