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ASML - first quarter sales beat expectations

ASML's first quarter sales nearly doubled year-on-year to €6.7bn, ahead of guidance.

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ASML's first quarter sales nearly doubled year-on-year to €6.7bn, ahead of guidance. Performance reflected improved installation times and earlier acceptance by customers.

Operating profit came in at €2.2bn, up from €0.8bn a year ago and slightly ahead of the previous quarter.

Free cash flow was €0.2bn compared to an outflow of €0.8bn. ASML ended the quarter with net cash of €3.1bn.

Second quarter sales are expected to land between €6.5-€7.0bn. Full-year guidance of sales growth above 25% remains unchanged.

Order intake slowed to €3.8bn, reflecting challenges in certain areas of the semiconductor industry. However, the €39bn order book is still about twice as large as expected sales for ASML's machines this year.

Share buybacks for the quarter totalled about €0.4bn. The buyback program of up to €12bn runs until 2025. ASML intends to declare a €1.69 dividend at its AGM bringing total 2022 dividends to €5.80, an increase of 5.5%.

The shares were down 2.3% in early afternoon trading.

View the latest ASML share price and how to deal

Our view

Netherlands-based ASML is a market leader in lithography machines used to make semiconductor chips. Without these, you wouldn't have the chips that power the latest phones, computers or even cars.

ASML is the sole producer of the most advanced type of lithography machines, called Extreme Ultraviolet (EUV) lithography. It took over two decades to research, develop and commercialise the technology involved in EUV - which is now a very deep moat for any competitor to try and breach.

Long-term trends such as increasing connectivity, artificial intelligence, unprecedented data volumes, and the energy transition underpin forecasts that the semiconductor market could double by 2029. However, it's going through a rough patch currently. That's why being the sole supplier of EUV machines has its perks. A €39bn sales backlog far exceeds consensus forecasts of system sales for 2023, and supports guidance that this year's sales will grow by more than 25%.

These targets appear achievable despite a lull in demand for semiconductors. There's also the services side of things, a recurring revenue stream that makes up around a quarter of annual sales. Though, these revenues have dipped a little of late, as customers defer upgrading decisions.

It's the company's capacity to manufacture and deliver its machines that are the main constraint on growth. In response, ambitious plans are afoot to increase production capacity of existing product lines and installation times have improved markedly in the first quarter. These plans aren't cheap, with annual investment of about €0.5bn for the next five years. Given the strong balance sheet and record of cash generation we don't think funding is likely to be a challenge.

ASML's unique position in the semiconductor ecosystem leaves it well positioned to benefit from supportive policies and budgets, as nations push for self-sufficiency in this strategically important industry. This also comes with risks. The Dutch Government is imposing export restrictions on certain lithography tools to China, the company's third largest market. ASML isn't expecting a material impact, but it's something to be mindful of until further clarity emerges.

There are also some disruptive technologies on the horizon such as Applied Materials' Centaura Sculpta machine. We think it's way too early to tell what if any impact this will have on ASML. But this isn't a direct replacement for its products which remain exposed to many positive long-term drivers.

Overall, we think ASML's market position and order book makes its earning power extremely robust, even in the face of a recession. The valuation has come back from the heady heights of the pandemic, but the price/earnings ratio still sits in the high twenties. We think the rating is well deserved, but it also brings with it pressure to deliver.

ASML key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture. Overseas dividends can be subject to withholding tax which might not be reclaimable.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 19th April 2023