ASML Q1 Earnings Preview: Lithography Machine Shipments Decline, Revenue Expectations Diminish

ASML is a Dutch semiconductor equipment giant, specializing in the design and manufacture of high-end lithography systems. It is an essential equipment supplier in the global advanced integrated circuit manufacturing, with a product line that includes deep ultraviolet (DUV) and extreme ultraviolet (EUV) lithography systems. The company's exclusively supplied EUV lithography machines are crucial for achieving today's most advanced chip manufacturing nodes (such as 3nm, 5nm), making ASML irreplaceable in the global semiconductor industry chain. Next, let's take a look at how the company's specific business will evolve in Q1 2024, and which areas investors should pay special attention to.

ASML's core business consists of two parts: system and net sales business (79.61%), and network services and field options net sales (20.39%). The former includes the sales of various subdivided lithography machine products, including sales of the company's EUV lithography machines, ArF series and KrF series DUV lithography machines, etc.; the latter mainly handles remote monitoring of ASML's lithography machine products, software updates, hardware upgrades, and lithography machine maintenance and other after-sales services.

Chart: ASML's Main Business Composition

Considering that ASML's system and net sales business revenue accounts for nearly 80% of the total revenue, this part of the business is the main pillar of the company's total revenue. Due to seasonal factors and the restriction on the export products of ASML's lithography machines in 2024, we expect ASML's overall shipments in Q1 2024 to decline, further leading to a decrease in system and net sales business revenue. According to Bloomberg consensus expectations, ASML's system and net sales business revenue in Q1 2024 is expected to be $4.4 billion, down 23.3% year-over-year, and down 28% quarter-over-quarter; EUV lithography machine sales are expected to be $1.78 billion, a decline of over 42% year-over-year, and down 27.2% quarter-over-quarter.

With the main business performance being less than ideal, it's not difficult to infer that ASML's total revenue is also expected to see a significant decline. According to Bloomberg consensus expectations, ASML's total revenue in Q1 2024 is expected to be $5.8 billion, down 19.7% year-over-year, and down 25% quarter-over-quarter. It's worth noting that with TSMC's advancement of the N2 process and Micron's new orders for ASML's lithography machines, ASML's revenue in Q3 2024 is expected to turn from loss to profit, and the downward trend in year-over-year revenue is not expected to continue for a long time.

Chart: Changes in ASML's Revenue

In addition to the potential seasonal impacts, the sales process of various series of lithography machine products in Q1 2024 will also be limited by the latest export control regulations issued by the Netherlands and the United States. Therefore, we expect a significant decrease in ASML's lithography machine product shipments.

According to public information from early April, several of ASML's lithography machines, including the NXT:2000i, will not receive export licenses to China in 2024, and maintenance for lithography machines already sold in the Chinese market will also be stopped, which is expected to affect the sales volume in the Chinese market by 10% to 15%. Additionally, the company's performance data for 2023 shows that ASML's sales volume in the Chinese market accounted for 29% of the total sales volume of its lithography systems, up from 14% in 2022, which directly led to a significant increase in the company's performance for that year.

Therefore, we expect that the decline in ASML's lithography machine sales in the Chinese market will have a relatively obvious negative impact on the total shipment volume of the company's lithography machine products. According to Bloomberg consensus expectations, ASML's product shipment volume in Q1 2024 is expected to be 95 units, down 4.6% year-over-year, and down 23% quarter-over-quarter.

The decrease in shipments of both EUV lithography machines and ArF - Immersion lithography machines. According to Bloomberg consensus expectations, the shipment of EUV lithography machines is expected to be 9 units in the first quarter, a year-over-year decrease of about 45%, and the shipment of ArF - Immersion lithography machines is expected to be 20 units in the first quarter, a year-over-year decrease of about 18%.

Chart: Change in Shipment Volume

In terms of expenses, ASML's operating expenses mainly consist of sales and management expenses and R&D expenses, with R&D expenses accounting for about 77% of total operating expenses. According to the guidance from the company's Q4 2023 earnings call, ASML will increase its R&D cost investment in 2024 to achieve upgrades and updates to its lithography machine products.

According to Bloomberg consensus expectations, ASML's total operating expenses for Q1 2024 are expected to be $1.453 billion, up 12% year-over-year; R&D expenses are expected to be $1.137 billion, up 11.8% year-over-year, and the company's R&D expense ratio also increased from 2.4% in the previous quarter to 19.5% in this quarter. Overall, ASML's expense end spending is expected to increase significantly, negatively impacting the company's profits. Given that the cost rise is due to increased R&D spending, it is expected that the company will profit from R&D in the future.

In terms of profit, combined with the expected decline in operating revenue and the expected increase in expenses mentioned above, we anticipate that ASML's net profit for Q1 2024 will also experience a significant decline. According to Bloomberg consensus expectations, ASML's net profit for Q1 2024 is expected to be $1.186 billion, down 43.5% year-over-year, and down 46.2% quarter-over-quarter. ASML's net profit margin is expected to slide from 32% in the previous quarter to 20% in this quarter, and the gross margin is expected to decrease from 51.4% to 48.8%, indicating a slowdown in profitability. Additionally, the company's expected EPS is $3.03, down 43% year-over-year, and down 45% quarter-over-quarter.

Investors should note that although ASML's Q1 2024 profit expectations are expected to decline significantly, the company's net profit margin still remains at a relatively high level of 20%, and Bloomberg expects the company's sales in Q3 2024 to rebound significantly, driving net profits back to high levels.

Chart: Changes in ASML's Profitability

Furthermore, from a return on equity (ROE) perspective, ASML's ROE was 58% for the past 12 months as of December 2023, which is quite considerable compared to the industry average. Additionally, we note that ASML's median dividend payout ratio over the past three years is 34% (the company retained 66% of profits), and ASML has been paying dividends for at least ten years or more, indicating the company's commitment to sharing profits with shareholders. According to Bloomberg consensus expectations, ASML's dividend payout ratio for the next three years is projected to be about 29%. Based on this, ASML's future ROE is forecasted to be 56%.

Overall, although ASML's profit growth is expected to slow, the company has historically reinvested a large portion of its profits at high rates of return, leading to significant earnings growth. Therefore, we expect ASML to have significant growth potential in the future.

As a globally renowned manufacturer and vendor of photolithography equipment, ASMLis expected to witness a decline in its total revenue for Q1 2024, accompanied by a substantial drop in EPS, given the decrease in the sales volume of lithography machines during the first quarter.

Looking at the stock performance thus far, ASML's share price has appreciated by over 26% since the beginning of 2024. Notably, major investment banks such as J.P. Morgan and Wells Fargo hold an overweight or buy stance on the company's Q1 share price outlook. Despite this, the preceding analysis clearly indicates a significant downturn for ASML in the first quarter.

Given that ASML's shares have registered considerable gains in Q1 2024, the anticipated earnings slump has not yet been factored into the stock's prior price movements. Moreover, the market generally holds a positive view of the share price, with ASML's trailing twelve-month dividend yield standing at a modest 0.69%, while the current risk-free rate in the US approaches 5%. In the absence of robust growth drivers from the company's operations, we anticipate a degree of downward pressure on ASML's share price.

Considering the poor performance of the company in 24Q1, investors can purchase put options on the company. If the stock price falls as expected, the value of the put options will increase, allowing investors to profit either by selling the options or exercising them.

For investors who already hold ASML shares, they can adopt a reverse conversion strategy. This involves selling call options while simultaneously buying put options, providing protection against a decline in the stock price. When the stock price experiences a significant drop, the value of the put options rises, and their gains can offset losses incurred due to the stock price decline, effectively setting an effective downside stop-loss for the stock position.

The following chart shows the current option holdings in the market regarding ASML shares. Investors can refer to this chart as a basis for hedging risks or arbitrage, making sound investment decisions accordingly.

Chart: ASML Option Holdings as of April 9th for the Past 30 Days

Table: Top Five Options Trades as of April 9th, Predominantly Calls