Insights

Why ASML Holding Fell 10.2% in April

What happened
Shares of semiconductor equipment manufacturer ASML Holding (NASDAQ: ASML) fell 10.2% in April, according to data from S&P Global Market Intelligence.
ASML released its first-quarter earnings report during April, but really, it was likely the massive sell-off across technology stocks that took the stock down, as interest rates rose and fears of a recession overcame everything.
So what
In the first quarter, ASML delivered revenue of 3.5 billion Euros, and earnings per share of 1.73 Euros. Both figures beat expectations, although investors looking at just the headlines may have been surprised that revenue only grew 11.8%.
However, that’s misleading. ASML shipped more machines than the 3.5 billion worth, but since it has begun implementing its “fast shipping” policy to customers, it can’t recognize all that revenue right away. That’s because revenue can only be recognized once a machine is qualified at the customer’s fab, whereas qualification used to take place at ASML’s factories.
So, the headline earnings number is somewhat irrelevant. More important was management’s commentary that it sees demand for ASML’s lithography machines exceeding its current capacity, and by a lot. On the call with analysts, CEO Peter Wennink said ASML is only currently able to fulfill about 60% of demand for lithography machines.
That’s partially due to some supply chain shortages, but also overwhelming demand for semiconductors, both on the leading edge and trailing edge. So ASML is seeing booming demand for both its proprietary extreme ultraviolet lithography (EUV) machines, on which it has a monopoly, and also for deep ultraviolet (DUV) machines for lagging-edge semiconductors as well.
Image source: Getty Images.

Now what
So why did the stock sell off? Well, ASML does trade at 32 times this year’s earnings estimates, which is a tad high for the semiconductor equipment space. April saw growth stock valuations compress a lot, as interest rates have risen. 
That being said, demand is off the charts, so ASML has plenty of growth in front of it. Management said it’s now frantically trying to increase its 2025 capacity plans; the new goal is to deliver 600 DUV machines and 110 EUV machines by that time, up from the previous capacity goal of 375 DUV machines and 70 EUV machines by 2025.
At ASML’s investor day back in September 2021, management had guided for between 24 billion and 30 billion Euros in revenue by 2025; however, with the new capacity expansion, that number could be much higher. A 50% increase over the midpoint would lead to 40 billion Euros in sales. ASML also guided for roughly 40% operating margins and 33.5% net margins by 2025.
Assuming 40 billion Euros in 2025 sales and 33.5% net margins, and ASML is only trading at around a mid-teens multiple on potential 2025 earnings, which is pretty reasonable for a company growing as fast ASML. Management is also repurchasing stock and growing its dividend, so its share count should be lower by then, too. 
Long story short, ASML’s demand is far exceeding its numbers, and this techwide sell-off looks like an opportunity for long-term investors to get shares on the cheap.
Billy Duberstein has positions in ASML Holding. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends ASML Holding. The Motley Fool has a disclosure policy. –

What happened

Shares of semiconductor equipment manufacturer ASML Holding (NASDAQ: ASML) fell 10.2% in April, according to data from S&P Global Market Intelligence.

ASML released its first-quarter earnings report during April, but really, it was likely the massive sell-off across technology stocks that took the stock down, as interest rates rose and fears of a recession overcame everything.

So what

In the first quarter, ASML delivered revenue of 3.5 billion Euros, and earnings per share of 1.73 Euros. Both figures beat expectations, although investors looking at just the headlines may have been surprised that revenue only grew 11.8%.

However, that’s misleading. ASML shipped more machines than the 3.5 billion worth, but since it has begun implementing its “fast shipping” policy to customers, it can’t recognize all that revenue right away. That’s because revenue can only be recognized once a machine is qualified at the customer’s fab, whereas qualification used to take place at ASML’s factories.

So, the headline earnings number is somewhat irrelevant. More important was management’s commentary that it sees demand for ASML’s lithography machines exceeding its current capacity, and by a lot. On the call with analysts, CEO Peter Wennink said ASML is only currently able to fulfill about 60% of demand for lithography machines.

That’s partially due to some supply chain shortages, but also overwhelming demand for semiconductors, both on the leading edge and trailing edge. So ASML is seeing booming demand for both its proprietary extreme ultraviolet lithography (EUV) machines, on which it has a monopoly, and also for deep ultraviolet (DUV) machines for lagging-edge semiconductors as well.

Image source: Getty Images.

Now what

So why did the stock sell off? Well, ASML does trade at 32 times this year’s earnings estimates, which is a tad high for the semiconductor equipment space. April saw growth stock valuations compress a lot, as interest rates have risen. 

That being said, demand is off the charts, so ASML has plenty of growth in front of it. Management said it’s now frantically trying to increase its 2025 capacity plans; the new goal is to deliver 600 DUV machines and 110 EUV machines by that time, up from the previous capacity goal of 375 DUV machines and 70 EUV machines by 2025.

At ASML’s investor day back in September 2021, management had guided for between 24 billion and 30 billion Euros in revenue by 2025; however, with the new capacity expansion, that number could be much higher. A 50% increase over the midpoint would lead to 40 billion Euros in sales. ASML also guided for roughly 40% operating margins and 33.5% net margins by 2025.

Assuming 40 billion Euros in 2025 sales and 33.5% net margins, and ASML is only trading at around a mid-teens multiple on potential 2025 earnings, which is pretty reasonable for a company growing as fast ASML. Management is also repurchasing stock and growing its dividend, so its share count should be lower by then, too. 

Long story short, ASML’s demand is far exceeding its numbers, and this techwide sell-off looks like an opportunity for long-term investors to get shares on the cheap.

Billy Duberstein has positions in ASML Holding. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends ASML Holding. The Motley Fool has a disclosure policy.

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