ASML Holding NV’s rally to a record high this week illustrates how the chip tools agency is cementing its place on the coronary heart of the artificial intelligence growth.
Europe’s most precious know-how firm is on tempo for its finest week in additional than a yr, set for a 16% acquire after earnings that provided one of many strongest indicators but that its cutting-edge machines — seen as a bellwether for the semiconductor trade — are again in excessive demand.
“Nobody was expecting orders to come back so fast. The answer to that is in the high bandwidth memory business, and all this is driven by AI,” mentioned Oddo BHF analyst Stephane Houri. “If you wish to see some affect of AI within the numbers of ASML, that is the place it’s.
A resurgence in reminiscence chipmakers’ spending commitments was key to lifting ASML’s bookings to a file within the fourth quarter. That was helped by a requirement restoration round smartphones and computer systems, which require chips to retailer data.
The necessity for high-performance reminiscence chips — a bottleneck in realizing full AI potential, in response to ASML CEO Peter Wennink — additionally provides urgency for chipmakers to ebook excessive ultraviolet (EUV) lithography programs, a basic constructing block of recent chip manufacturing made by ASML. It usually takes the corporate between 12 to 18 months to ship an order of its flagship EUV system.
“There was an element of additional demand that even ASML did not quite expect,” mentioned Societe Generale analyst Alexander Peterc. And that’s pushed by “surging demand for AI infrastructure,” he added.
AI programs want specialised chips that may course of huge quantities of knowledge. Nvidia Corp.’s know-how, manufactured utilizing ASML’s machines, has dominated the sector — the California-headquartered firm’s inventory greater than tripled in 2023 and has continued to outperform.
In distinction, ASML spent a lot of 2023 contending with a slowdown in orders from a few of its largest prospects, together with Taiwan Semiconductor Manufacturing Co., as excessive rates of interest and inflation dampened client demand. ASML gained 35% final yr, lagging behind the Philadelphia Semiconductor Index’s 60% bounce.
ASML’s revival in orders comes amid a race between main chipmakers to provide 2-nanometer chips, a next-generation know-how that can make AI algorithms compute even quicker. On prime of that, ASML’s machines are required in a protracted checklist of chipmaking services which can be about to open. Subsequent yr, TSMC’s facility in Arizona, Intel Corp.’s manufacturing facility in Ohio and Samsung Electronics Co.’s plant in Texas will all be put into work.
On a one-year view, ASML’s shares seem costly. It at the moment trades at 40 instances subsequent yr’s earnings, effectively above the five-year common. However that ratio would come right down to historic ranges when 2025 earnings are taken into the consideration, a yr that the Dutch firm has repeatedly mentioned will see “very significant” progress.
Gerrit Smit, supervisor of Stonehage Fleming’s $2.5 billion World Greatest Concepts Fairness Fund, mentioned ASML stays cheaper than a pool of key AI enablers that he tracks, based mostly on a ratio that elements in subsequent three years’ of earnings progress.
One concern on ASML is tied to Chinese language chipmakers, which rushed to ship in lithography instruments final yr forward of export restrictions. Attributable to a front-loading of demand, gross sales to China might fall this yr, Berenberg analysts mentioned, although they anticipated demand from the nation to stay robust.
And as a “transition year,” 2024 is about to be a yr of restricted progress for ASML. The agency mentioned it’s seeing constructive indicators within the chip trade, however the form and tempo of a restoration is unclear. Reserving traits are usually unstable, and reaching the rosy 2025 outlook requires multiple quarter of strong orders. Whereas up on the week, ASML shares slipped Friday, amid sector-wide declines after Intel Corp.’s disappointing forecast.
“We expect 2024 not to be fantastic, but the market is supposed to look about 18 months forward,” mentioned Stonehage Fleming’s Smit.
