ASML Anticipates Robust Q2 on AI Chip Demand; Potential Upward Guidance Expected

When ASML (AMS: ASML) unveils its second-quarter results this Wednesday, a flurry of new orders is anticipated, thanks to surging demand for artificial intelligence (AI) chips. Helming this announcement will be the company's recently appointed CEO, Christophe Fouquet, who will also shed light on whether fervent purchasing by Chinese firms of equipment for older generation chips has continued. This particular trend has raised concerns among Western policymakers, given their restrictions on the purchase of advanced technology.

Speculation is mounting that ASML may revise its guidance upwards. Industry analysts suggest that key semiconductor manufacturers, notably Taiwan's TSMC (TPE: TSM), which fabricates chips for tech giants like Nvidia (NASDAQ: NVDA) and Apple (NASDAQ: AAPL), might ramp up and speed up their equipment purchases. ASML's prowess in the lithography system market, especially its monopoly on systems employing extreme ultraviolet (EUV) wavelengths, positions it as a crucial player for high-end chip production, including AI and smartphone chips.

Kevin Wang, an analyst at Mihuzo, anticipates ASML’s received order value could approach an impressive €5 billion for the second quarter, outpacing consensus estimates. Much of this demand is expected from TSMC for ASML's advanced EUV product line.

The upcoming results mark the first test for Fouquet, guiding Europe's largest tech firm through the complexities of the ongoing U.S.-China chip technology standoff. Valued around €400 billion (approximately $437 billion), ASML sees 2024 as a "transition year" with stable business before a robust rebound predicted in 2025, fueled by its most advanced tools.

ASML's stock has surged 45% this year, now trading at an impressive €1,000 per share—about 40 times the forecasted 12-month forward earnings. This valuation significantly overtakes the STOXX Europe 600 tech index. A burgeoning order book would reaffirm to investors that demand for ASML's cutting-edge products is clawing back following a tepid first half of 2024, a period heavily reliant on orders for older equipment from China.

Market watchers estimate a second-quarter net income of €1.41 billion on revenues amounting to €6.04 billion, derived from the mean forecast of 16 analysts using LSEG data. This contrasts to a net income of €1.94 billion on revenues of €6.90 billion during the same quarter in the previous year.

At the close of the first quarter, ASML had an order backlog of €38 billion. To meet its 2025 sales forecast, projected to be at the higher end of €30 billion-€40 billion, the company needs to secure new orders totaling €4 billion-€6 billion per quarter. With machines priced as high as $300 million each and delivery lead times of 12-18 months, ASML’s order fulfillment is closely coordinated with top customers, including Samsung (KRX: 005930), Intel (NASDAQ: INTC), SK Hynix, and Micron (NASDAQ: MU). For somewhat older chipmaking technologies, ASML faces competition from Japanese firms Canon and Nikon (OTC: NINOY).

Chinese companies, such as Shanghai Micro Electronics Equipment (SMEE), are endeavoring to develop rival lithography tools. Despite U.S.-led export restrictions preventing Chinese chipmakers from acquiring ASML's premier tools, these firms have escalated their purchases of older ASML equipment. Almost half of ASML’s sales in the first quarter were attributed to these purchases. Such rapid growth in China's purchases represents a shift in market share and heightened competition for non-Chinese firms.

In response, the European Commission has started consulting with European chip industry companies to ascertain whether Chinese state subsidies are distorting the market. ASML underscores the necessity of older chips, a need highlighted during the COVID-19 pandemic when shortages were rampant, and posits that China is stepping in to meet this demand.