ASML Earnings: Continued 2023 Strength and a Positive Long-Term Outlook Help Maintain Our $750 FVE

We maintain our $750 fair value estimate for shares of wide-moat ASML ASML after the firm’s third-quarter results met our expectations. ASML continues to enjoy strong growth in 2023 despite a soft chip market, in large part due to immense demand out of China for trailing-edge systems. We expect this demand to moderate going forward, both organically and due to recently updated U.S. export restrictions. Nonetheless, we believe ASML will make up for it with demand in other geographies. We like management’s longer-term commentary for a robust year in 2025, with rebounds in both the logic and memory markets. We continue to see ASML as a blue-chip firm with a strong grip on the lithography market that will enable durable long-term growth. We see shares as nicely undervalued.

Third-quarter sales rose 15% year over year to EUR 6.7 billion, near the midpoint of management guidance. Consistent with previous quarters, logic sales continue to outperform memory sales, with memory chipmakers remaining in a precipitous downcycle. ASML’s deep ultraviolet, or DUV, lithography tools have been the largest growth vector in 2023 as Chinese chipmakers build up stores of chip equipment due to fears over further future shipment restrictions from the U.S. These tools serve lagging-edge applications, like power chips used for automotive, energy, and “Internet of Things” customers.

ASML’s gross margin in the quarter exceeded guidance at 51.9%, up 52 basis points sequentially. Management credited the beat to a higher mix of DUV equipment, which offers a better margin than extreme ultraviolet, or EUV, tools.

Fourth-quarter guidance for sales between EUR 6.7 billion-EUR 7.1 billion implies 3% sequential growth at the midpoint. ASML is also guiding for a step down in gross margin from a more normalized mix than the third quarter, with a midpoint of 50.5%.