Assess ASML Using Two Segment Metrics
Last Tuesday, ASML Holdings inadvertently released its Q3 earnings a day early. The consequence? Over $420 billion shed according to Bloomberg. They missed two key metrics: a look-back order on Q3 that came in at €2.6B versus the expected €5.39B, and a 2025 net sales forecast of €30B - €35B, down from previous expectations of €30B - €40B.
When faced with negative surprises, the essential questions are whether the trends are company-specific or market-induced, and if they are cyclical or secular. The semiconductor industry, driven by AI, continues to grow rapidly. ASML's major customer, TSMC, as well as downstream customers like Nvidia and AMD, have shown strong earnings. However, the traditional Logic segment is “in a slower ramp” and the Memory segment has “limited capacity additions,” per CEO’s statement.
So, two market-driven demands (from AI and Logic segments) are secular in nature but are taking longer to realize, while the Memory segment is limited. The other big factor that is more pronounced for ASML is the geopolitical factor.
Sales in China remain strong, hitting a five-quarter high of €2,785, which accounted for 47% of ASML's total net sales—1% higher than the same quarter last year:
So where did those shortcomings come from? Looking at the sales trends by different lithography units:
We noticed the peak for most types was achieved in 2023Q4, while only the 2nd-tier ArFI type demand was picking up in the last three quarters.
Below is an excellent illustration of the different types of? lithography units measured using wavelength from an article from semianalysis:?The Gaps in the New China Lithography
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We know ASML is barred by both the US and Dutch governments from selling its most advanced EUV, and since Jan 1st, 2024, its immersion DUV lithography machines to China. So what did ASML actually sell to China in the latest quarter in order to realize the €2,785 sales???
We were able to obtain the price per unit for each type of lithography in 2022 and applying the same % increase as what happened from 2020 to 2022, we were able to deduce the net sales breakdown for each type in Q3 2024:
The total came in 99.5% of the reported 5,926 and the sales of the ArFI type came in 98.7% of the actual sales of 2,785 derived from China!
So which region is actually experiencing a trough right now? Replotting the sales by region graph as an area graph, two regions stood out, South Korea and EMEA:
Looking forward, ASML made an interesting comment that sales to China will “normalize to 20% of total revenue in 2025”. Combed with the revised mid-point projection of €32.5B in 2025 sales, we tried our best efforts to derive both the number of DUV lithographic units that China would reduce in buying and the number of EUV machines that the rest of the world would have to buy in order to achieve this projection:
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Thus?for the next year, we can expect a reduction in DUV units by less than 10 and an increase in EUV units by more than 17 in order for ASML to achieve its estimated goals.
ASML reported its Q4 2024 earnings today. They sold 119 new and 13 used lithography systems this quarter, compared to 106 and 10, respectively, in the previous quarter. However, they no longer break down the systems sold by type. Based on our analysis from last quarter, we estimate that ASML sold approximately 13 EUV units (€2.9B / €214,842 each) and 58 DUV units (€4.2B / €72,354 each) this quarter. We believe the EUV number might be high since they mentioned that two units sold this quarter are the High NA version, and the DUV number might be low since we have assumed all the ones sold were the ArFI types. We had estimated that ASML could achieve its 2025 revenue goal by selling at least 17 more EUV units to offset a potential reduction of 10 DUV sales to China. The Q4 numbers are significantly above our estimates. During the earnings call, CFO Roger Dassen responded to Bernstein analyst Sara Russo's question by stating, "With the €3 billion that we have in there, we've reached that point. So it's clear that we're either starting to build on 2026, or we're starting to build into the higher end of the guidance." The stock reacted positively, gaining 4.29% in the regular session of the US market.