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ASML - order intake spikes

ASML's net sales grew 12.6% to €7.2bn in the fourth quarter, taking the total for 2023 to €27.6bn...

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ASML's net sales grew 12.6% to €7.2bn in the fourth quarter, taking the total for 2023 to €27.6bn. Final-quarter growth was much slower than the 30.2% seen across the full year.

Order intakes jumped 45.4% to €9.2bn in the final quarter. This takes the order backlog up to €39.0bn as global demand for its semiconductor-making products remains "strong".

Operating income rose 12.6% to €2.4bn with the associated margin hovering around 33%.

Net cash fell from €3.9bn to €2.4bn. Free cash flow fell from €4.9bn to €2.6bn due to the timing of certain receipts and payments.

ASML expects 2024's net sales to be in line with 2023's levels, with "significant growth" in 2025.

The group proposed a final dividend of €1.75, taking the total for 2023 up 5.2% to €6.10. No share buybacks were made in the final quarter.

The shares rose 4.8% in pre-market trading.

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Our view

Netherlands-based ASML is the 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.

It's no secret that the semiconductor industry had a tough time of late. Macroeconomic headwinds and export restrictions of high-end spec to China have contributed to an 11% decline in worldwide semiconductor revenue over 2023. Despite this, ASML's revenue and operating profit jumped around 30% and 39% respectively, highlighting the unique position the group holds in the industry.

Longer-term trends such as artificial intelligence, unprecedented data volumes, and the energy transition underpin forecasts that the semiconductor market could double by 2030. 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.

Record fourth-quarter order intakes pushed the order book up to €39.0bn, supporting the future demand outlook. This order backlog gives ASML great revenue visibility over the next 12-18 months and is underpinning the group's expectations for significant growth in 2025. But nothing is guaranteed.

There's also the services side of things which covers fixing and upgrading machines - a recurring revenue stream which makes up around 20% of sales. The more machines sold, the more recurring revenue ASML receives, making that portion of revenue extremely robust.

But there are some challenges to be wary of. The company's capacity to manufacture and deliver its machines is a potential constraint on growth. In response, ambitious plans are afoot to increase headcount and production capacity. These plans aren't cheap but given the strong balance sheet and record of cash generation, we don't think funding is likely to be a challenge.

Overall, we think ASML's dominant market position leaves it well-placed to grow over the long term. The valuation's come back from the heady heights of the pandemic, but at close to 35 times forward earnings, the shares are still priced for growth. So at a time when guidance suggests business will be flat for the immediate future, 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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Article history
Published: 24th January 2024