ASML
🌍 ASML holds a near-monopolistic position in advanced lithography machines, crucial for high-end semiconductor manufacturing, making it strategically vital globally.
📉 Despite strong Q4 results with ~30% growth in sales and net income, the stock has fallen significantly due to concerns over future growth, particularly restrictions on sales to China, which recently accounted for over 40% of revenue.
⚠️ Significant risks include US pressure limiting sales to China and potential competition from companies like Huawei, challenging ASML’s dominance and justifying caution despite a historically low valuation (around 26x PER).
@invertirdesdecasa:
“ASML, one of the most strategic companies in the world, has been falling by 40%, and we need to analyze it. ASML is an advanced lithography company that makes key machines, absolutely key, in the entire process of making chips, of founding high-technology chips. In other words, without ASML, and without Taiwan Semiconductor, and without Nvidia, and these companies you hear so much about, but without ASML, it would be a dream to try to make the chips needed to power all these chatbots and artificial intelligence ecosystems. It’s based in the Netherlands, has an incredible strategic position, which is both a blessing and a curse, we’ll discuss that. It also trades in the United States, on the Nasdaq if I’m not mistaken, and you can also buy it in Argentina through your broker’s foreign operations. We will analyze it, look at its business growth, provide more specifics about what it does, its importance, why it’s in a very complicated spot because it’s too important as a company, and of course, we’ll do a valuation because after a 40% drop, I think its price is much more interesting than before. In the last year, a drop of almost 40%, not counting dividends of course, trading at €560 per share, about $605 at the time of recording, closing on April 4th. A market cap of €225 billion. We’ll see all results in euros, but then of course, we’ll have calculations in dollars. A quite pronounced drop, even from highs, because it had a small rise and then started falling more than 50% to date. Let’s first look at its results. Then we’ll see what it does, who it sells to, who it doesn’t, the importance of its machines, and why it has this somewhat complicated position. Sales growth rebounded quite well, better than the market expected in the fourth quarter. It hasn’t presented the first quarter yet; it presents mid or late April. Sales growth of almost 30%, and here, net income growth of almost 32%, a bit more than €2.6 billion. That is, a company earning a lot of money in just one quarter. Its machines are not cheap at all; in fact, before looking at ratios, it takes three or four 787 airplanes, if I recall correctly, to transport the complete machine. So imagine what these little machines are, quite expensive. In the ratios, I think it’s important to highlight that the operating margin relative to sales grew quite well, three percentage points, very interesting. It was a bit of a down year for company spending on new orders, at least for ASML this year, which resulted in a very good improvement in its final net margin. This is good; a net margin of almost 30% of sales is excellent. And this part also pleased the market quite a bit: the net bookings, meaning machine reservations or price increases for previous orders not yet delivered but accepted by consumers, i.e., future revenue for ASML, came in much better than the market expected. Although, as I said, 2024 was a year of cooling orders for these types of machines, except for China, because they fell year-over-year, they were much better than the market was expecting. Here you can see the total sales in euros. You’d need to multiply by the dollar exchange rates, not too complicated, but the graph shows it in euros for a Dutch company. You can see how it had been growing spectacularly in recent years. And this year, despite the whole AI boom you see, it also sells other types of machines for RAM, for other companies that saw a significant cooling this year. Growth wasn’t entirely interesting, or at least different from the last 5 years. And if China hadn’t been buying, I dare say the drop would have been quite pronounced, around 20-30%. But beyond everything, it managed to hold up the year, largely thanks to the Asian giant. And here you can see it perhaps more clearly. Look at 2023: only 29% of ASML’s annual sales went to China, 30% to Taiwan, and the US barely registered with 10%. Now, this year the US grew a bit, but China accounted for practically almost half of the company’s total revenue, a bit more than 40%, from a single country. Who says China’s domestic market doesn’t need it, or is stagnant, or has deflation, or needs more development? It was the biggest buyer. And you’ll see it even more in this slide. At one point, and this is as of the last quarter of 2024, but in the first half of 2024, meaning the last two quarters shown here, China was literally more than half of the sales, a single country. Now, this is the question mark, or what might worry an ASML investor: this country that was buying so much, as of Q3, Q2, and Q1 it was over 50% China, has now dropped sharply because they are not allowed to sell to China. ASML is facing pressure from the US government not to sell machines to China because it could develop its companies too much, grow much more. The US doesn’t want to be second. Sorry, the official narrative slipped out: because China could develop its military sector, and that’s dangerous globally, as if US weapons don’t kill millions of lives every year. Anyway, irony aside, the truth is that if it can’t sell to China what China wants and can buy, sales should suffer. However, that doesn’t seem to be what ASML management is aiming for. These are projections; it’s a fairly uncertain year ahead. We talked about Howard Marks’ views on uncertainty in the previous video. This year is still young, much remains, but they estimate, from the €28+ billion in sales seen in 2024, a wide range of probabilities but a possible interesting increase in business to around €32.5 billion (midpoint used for calculation). Will it achieve this without China buying so much? Well, I think that’s an interesting question. I think it can; the world is very large, let’s be clear, the world is giant. Many of these machines are needed, and ASML produces them almost exclusively today. But it will be harder. Imagine you have a company, and your main client, 50%, starts buying less and less. Well, it will affect you. So let’s move to valuation and conclusion. ASML has a market cap of €225 billion, which at current exchange rates (euro appreciating against the dollar) is almost $250 billion, around $605 per share. For 2025, using the midpoint sales projection of €32.5 billion and ASML’s average profit margin, we get about €10 billion in pre-tax profit and €8.5 billion in net profit. This means it’s trading at 23 times pre-tax earnings. Interest rates in Europe are around 3.5%. If you do 1 divided by 23, you get an initial yield, similar to a bond’s initial yield. The benefit is that ASML’s earnings can grow over time, unlike bond payments which are fixed. It capitalizes at 26 times net earnings (PER). However, there’s a caveat: a Chinese competitor, Huawei, which had its legs and hands cut off, senses removed by harsh sanctions from Donald Trump around 2017-2018, is now surpassing global competition again. It doesn’t trade publicly, but it’s working on machines using a different process because it lacks access to many components ASML has, and it’s achieving better results than ASML’s machines. So, I always say, be very careful when China competes because they make everything good, nice, cheap, and *too* good, *too* nice, and *too* cheap. Conclusion: This company is highly requested because it’s terribly strategic. Again, it’s the only one making advanced lithography machines, a key process for printing those plates for high-tech semiconductors. Is 23 times pre-tax earnings, or 26 times net earnings, a low valuation range? Historically, yes, very low for what this company used to trade at. Why? Because the market always valued it highly. Why? Again, because nobody else can yet make the machines ASML makes. Selling with a monopoly is much better than competing. It sounds bad for the public because prices go up and up, there’s no way to compete, but for the company with the monopoly, it’s a terrible source of income. Will it continue this way? That’s a very interesting question. I don’t know. Whenever China wants to compete in something, I watch closely what competitors in China do and how it can affect the global supply chain. What I mean is, if China competes against a local competitor only working in Latin America or Africa, I’m not saying it will always win, because knowing the local business is very important. But when we’re talking about global trade, machines everyone wants, and you’re a supplier, and a Chinese supplier comes to compete, I would be somewhat careful with the valuation I accept when buying that company. It has fallen 50%, it was at €1000 at some point, fallen a lot because the market thinks, thought, and will think that many more AI chips will be needed. The issue is, will they always be extremely expensive? Will there always be high demand? Will there always be a line to buy ASML’s machines? How will the fact of not selling to China affect it? You have to look at all these things carefully, factor them into the valuation, and decide whether to invest or not. Many clients I’ve advised have this company in their portfolio because, again, it’s very important, but caution. You know I’ve been wrong many times, and what I say isn’t gospel. Just look very closely at all these issues we’re discussing.”
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