ASML bullish on H2, yet Q2 strength seemingly driven by China’s machine stockpiling, says GlobalData

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Following the news that ASML reported solid Q2 2023 results; Josep Bori, Thematic Research Director at GlobalData, a leading data and analytics company, offers his view:

“ASML’s Q2 2023 results were solid, and the company raised full-year guidance. However, investors may be less sanguine about weak bookings and the fact that the quarter was driven by legacy deep ultraviolet (DUV) machine shipments to China, which has been stockpiling ahead of further export bans, rather than advanced extreme ultraviolet (EUV) machine shipments.

“With solid revenue growth in Q2, despite the tough comparable, and a confident albeit very backend-loaded outlook for the second half of 2023, the company is well-positioned. Surprisingly, its EUV machines, capable of manufacturing the smallest chips (i.e., seven, five, and soon three-nanometer nodes), accounted for just 37% of total system sales in Q2, compared to 54% in Q1. This was due to the significant bounce in DUV shipments to China. The country appears to be stockpiling equipment ahead of further export bans, and this would suggest some sales have been brought forward from H2 and possibly 2024.

“Further, quarterly bookings remain in negative territory, down 47% after a 46% decline in Q1. That said, it is very encouraging that the company raised its guidance for 2023 revenue growth from 25% to 30% despite this. ASML’s manufacturing technology leadership places it front and center of any country’s artificial intelligence (AI) strategy, as advanced AI chips require this miniaturization level.

“Management’s outlook statement is balanced but slightly more positive than in Q1. Last quarter, management highlighted mixed signals on demand from the different end market segments and ongoing inventory corrections, leaving guidance unchanged. This time, it talked about its supply chain partners actively adding and improving capacity to meet current and future customer demand and raised full-year guidance.

“While Nvidia delivered much better results than feared for last quarter, the overall semiconductor industry still faces a difficult demand environment with double-digit revenue declines at Intel, AMD, Nvidia, Micron, and Kioxia. If ASML delivers on its 30% revenue growth target for 2023, the company will have weathered this downturn considerably better than its peers. This will strengthen its position as a top-quality semiconductor stock in investors’ minds.

“Investors’ confidence in ASML’s ability to deliver on its 2023 outlook will hinge on three factors: 1) the specifics of the chip export bans adopted by the Dutch government earlier this year, 2) the impact on demand of ongoing interest rate increases to fight stubborn inflation, and now also 3) the potential ramifications of the Chinese government’s retaliatory export bans on gallium and germanium, two metals used in semiconductor manufacturing.

“As the China-US trade war continues to escalate, it is still unclear which products will fall under new restrictions or if any limits on servicing the installed base in China will be put in place, all of which have a significant bearing on its business outlook. That said, in the long term, end-user chip demand remains strong. Therefore, manufacturing tools’ demand will eventually shift from the restricted markets to other regions that ASML can serve.

“From a broader sector perspective, the fundamental question in the coming months is the sustainability of ASML, TSMC, Samsung, and Canon’s compliance with expanding US restrictions on the export of advanced chips and tools to China. Remaining neutral will become increasingly difficult for companies based in Taiwan, South Korea, the Netherlands, or Japan, despite the significant economic costs of not doing so.

“The US export bans on chip technology transcends the semiconductor industry. In GlobalData’s view, this is about AI dominance, which underpins what many call the fifth industrial revolution, and, ultimately, about global economic leadership in the next few decades.

“GlobalData report, “Artificial Intelligence (AI) Chips – Thematic Research,” predicts that the accelerating adoption of AI in commercial and military use cases will drive the global AI chips revenue at a compound annual growth rate of 30% from $12 billion in 2021 to $130 billion in 2030.”

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