ASML Holding N.V. (NASDAQ:ASML) reported Q4 2023 earnings earlier today (January 24). Shares are trading 10% higher at the time of writing. However, although ASML did report excellent bookings in Q4, I am not sure that enough new information has come to light to warrant a 10% increase in ASML’s valuation – amounting to $30 billion of market capitalization. In this article, I explain the rationale for my lukewarm response to ASML’s earnings (contrary to the market’s reaction).
ASML Beat In Q4, But It Isn’t Very Meaningful
For Q4, ASML reported revenue of €7.2 billion, clocking in a little higher than its prior guidance of €6.7-€7.1 billion. ASML also beat on gross margins, coming in at 51.4% versus guidance of 50%-51%.
However, per CFO Roger Dassen in this quarter’s earnings video interview transcript, the outperformance in both revenues and margins is primarily attributable to higher-than-expected revenues from ASML’s Installed Base Management. Installed Base Management clocked in at €1.6 billion versus prior guidance of €1.4 billion on the back of “higher service revenue and higher revenue from upgrades.” It follows that as far as system sales are concerned, ASML performed in line with its previous guidance and Q4 was more or less uneventful on the system sales front.
And so although ASML outperformed financially this quarter, this outperformance is not necessarily very meaningful from a long-term perspective. While all revenue is good, what investors are primarily interested in with ASML is its lithography systems. An earnings beat based on Installed Base Management outperformance doesn’t tell us anything very significant about lithography systems-which is ASML’s bread and butter.
And even as far as Installed Base Management is concerned, it is not clear if the excess revenue from upgrades are merely a short-term boost or whether investors should expect some meaningful improvement in ASML’s expected revenues from this segment in the long run. Installed Base Management is guided to be €1.3 billion in Q1 2024, so it is possible that there is not much meaningful change here.
ASML’s 2024 and 2025 Outlook Remains Unchanged
Overall, ASML maintained its tepid outlook for 2024. As ASML has previously also stated, it expects “2024 revenue to be similar to 2023” (€27.6 billion).
ASML also reiterated its long-term financial strategy for 2025 and continues to expect to hit its targets for the year – i.e., “€30 billion and €40 billion in 2025, with a gross margin between approximately 54% and 56%.”
Although 2025 is slated to be a strong year for ASML, with both top line growth and margin improvements on the cards, it is not clear that much new information has come to light today. ASML is sticking to its targets, which it was already well positioned to meet given what we know about extensive global investments in semiconductor fabs.
The Bookings Growth Is Ultimately Expected
ASML did report excellent results for bookings in Q4. Per management on the earnings call:
“Q4 net system bookings came in at 9.2 billion euros, which is made up of 5.6 billion euros for EUV bookings and 3.6 billion euros for non-EUV bookings.”
ASML’s backlog rose to €39 billion, compared to €35 billion at the end of Q3.
Last quarter’s bookings had been particularly low, clocking in at an uncharacteristically low €2.5 billion, of which only €0.5 billion was for EUV systems. Compared to this, the Q4 figures are certainly a welcome improvement.
Still, I cannot help but think that bookings for EUV systems were bound to pick up at some point. As readers can see in the figure below, there are quite a lot of fabs slated to enter production over the next couple of years. Given all this ongoing expansion in worldwide foundry capacity, it would have been more-or-less inevitable for bookings to eventually increase significantly, especially for EUV systems (you can’t run a fab without lithography systems).
It is also worth noting that €9.2 billion in bookings are impressive, of course, but they are also in line with what would be needed to get ASML to €30-40 billion in 2025, so again there is not that much of a surprise here.
And so although there is a bit of a surprise in how quickly bookings have turned around in Q4, I am not sure that much has changed in terms of ASML’s long-term outlook.
Overall, although ASML’s Q4 performance and booking numbers were both very good, I am not sure that we have learned anything from the Q4 report that should lead investors to revise the company’s valuation by 10%. The long-term outlook for ASML Holding N.V. seems to me to be the same as it was before, and ASML’s story is playing out more or less in line with what has been previously guided. It seems to me that today’s jump in share price may be a bit of an overreaction. I, therefore, maintain my hold rating for ASML stock.
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