ASML: Growth without a Spotlight
ASML has been a phenomenal growth story, which is highlighted by looking at its recent three-year operating performance, where earnings per share more than doubled from €6.34 in 2018 to €13.93 in 2021.
Sales grew from €10.9bn to €18.6bn over the same period. Digitalisation, artificial intelligence, 5G, vehicle electrification and cyber security are at the forefront of driving this growth, due to their requirement for ever more powerful microchip technology.
ASML describes itself as “the most important technology company you’ve never heard of”, reflecting its relatively low profile as an IT hardware supplier, when compared with consumer-facing tech companies like Apple or Facebook.
However, its importance within the tech ecosystem cannot be overstated as the recent issues resulting from microchip shortages illustrate. Through its global leadership in designing and producing the lithography machines that are an essential component in chip manufacturing, ASML is at the forefront of this innovation. All the major chip suppliers use ASML’s lithography machines in their manufacturing process. Essentially ASML enjoys a virtual monopoly on the production of EUV lithography machines, essential for chip shrinkage to meet growing technological demands. Shrinkage of microchips is a key manifestation of Moore’s Law, where computing would dramatically increase in power and decrease in cost at an exponential pace.
ASML’s share price performance has been phenomenal over the past five years as investors have woken up to its crucial positioning in the technological supply chain. More recently however, it has suffered a significant pullback, partly on concerns around supply-chain shortages, and at current levels there appears to be considerable upside for the medium-term investor.
Current trading: ASML issued Q222 results in mid-July, reporting that revenue had increased 34% year-on-year to €5.43bn, ahead of expectations of €5.25bn, with EPS coming in at €3.54, compared to €1.73 in Q221 and ahead of consensus of €3.44. Gross margin at 49.1% was in-line with guidance and ASML revised its dividend policy to now pay out quarterly, with initial payment of €1.37 set for the 12th of August. In the accompanying outlook statement, ASML halved full-year sales growth guidance to 10% reflecting continued supply chain issues, specifically an increase in the number of fast shipments of lithography machines in 2022. However, it is only an accounting issue and the revenue behind the growth guidance pull-back, which amounted to €2.8bn, will now be recognised in 2023. This is an increase from previous guidance of €1bn of delayed revenue. Gross margin for the full year is expected to be maintained around 50%. ASML commented that demand from end customers remains very strong with record net bookings of €8.5bn in Q2, driven by demand from the automotive sector and green energy transition, although there have been some signs of slowing demand in consumer related segments like PCs and smartphones.
ASML is a highly cash generative business and is able to return capital to shareholders via both an ongoing share buyback programme and a progressive dividend policy, which has now been revised to pay dividends quarterly. Over the past five years ASML has trebled its dividend pay-out, however due to exceptionally strong share price performance over the longer term the current yield is a relatively modest 1%.
ASML offers one of the strongest top-line growth stories in the large-cap European equity space. However, this comes at a significant premium. ASML trades on a 2023 price to earnings multiple of 28x and offers a prospective dividend yield of 1%. This compares to the broader European equity market forward multiple of 12x and yield of 3.8%. Room for multiple expansion from these levels appears limited and future shareholder returns will likely be driven by earnings growth and return of excess capital to shareholders. However, ASML is one of the stocks in the European universe where investors can have the highest conviction in medium term profit growth deliverability. Consensus estimates are for earnings per share to more than double between 2020 and 2023 and even these forecasts look relatively conservative against the current industry background and ASML’s competitive positioning within it. Consensus estimates are for ASML to deliver eps of approximately €20 euros in 2023 and putting the stock on a forward multiple of 35x gives our target price of €700. While ASML is currently down over 22% year-to-date, reflecting the sell-off in growth stocks driven by rising bond yields, recently this trend has begun to reverse, with the stock ticking up an impressive 35% in the last month.
James Buckley is a Senior Equity Research Analyst with Cantor Fitzgerald Ireland.
Cantor Fitzgerald Ireland Ltd. is regulated by the Central Bank of Ireland is a Member Firm of Euronext Dublin and the London Stock Exchange.