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ASML - full-year guidance intact, but order intake plummets

ASML's growth slowed substantially in the third quarter, compared to the first half of the year...

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ASML's growth slowed substantially in the third quarter, compared to the first half of the year. Net sales grew by 15.5% to €6.7bn, and operating profit increased by 12.6% to €2.2bn.

Order intake has also slowed to €2.6bn, down from €4.5bn in the previous quarter, some way short of analyst forecasts as customers showed caution on making new investments in machinery.

Full-year guidance for sales growth approaching 30.0% remains unchanged. In 2024 the company expects sales to be broadly flat, with significant growth expected in 2025.

Free cash flow was €618m. Net cash was down from €3.9bn to €0.5bn.

An interim dividend of €1.45 was announced. ASML spent around €100m on share buybacks in the quarter, taking the total for the first nine months of the year to €1.0bn.

The shares were flat following the announcement.

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 wide moat for any competitor to try and cross.

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. ASML sees an opportunity to more than double its sales and significantly expand margins by the end of the decade and we don't see this as unreasonable. But the market is going through a rough patch currently. That's why being the sole supplier of EUV machines has its perks.

At the last count, the order book stood at a whopping EUR38bn, which helps to smooth out peaks and troughs in the cycle. But to sustain growth, ASML needs to keep the orders coming in and that's proving tougher than it has been for a while. Order intake is likely to be the key metric to watch over 2024. EUV systems cost hundreds of millions of dollars so orders can be lumpy. If order intake fails to bounce back relatively quickly, delivering the significant growth promised in 2025 could be challenging.

Longer term, it's the company's capacity to manufacture and deliver its machines that are the potential constraints on growth. In response, ambitious plans are afoot to increase production capacity of existing product lines. These plans aren't cheap, with annual investment of about EUR0.5bn 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.

However, cash flow from operations has been on a downward trend in recent quarters. We're not too concerned yet. But if it continues it may indicate a bigger problem and distributions to shareholders, which have been historically dominated by share buybacks, may need to take a back seat. As ever there can be no guarantee of any shareholder returns.

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. Export restrictions on high-spec equipment to China, one of the company's largest markets, have continued to tighten. ASML isn't expecting a material impact, but it's something to be mindful of.

Overall, we think ASML's dominant market position leaves it well placed to grow over the long-term. However, the exact trajectory of that growth is becoming harder for the market to predict. The valuation has come back from the heady heights of the pandemic, but at close to 30x forward earnings the shares are still priced for growth, so the risks of further ups and downs remain elevated.

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: 18th October 2023