Strong demand at ASML points to the coming chip upswing

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Does a new chip cycle beckon? Record fourth-quarter orders of €9.2bn at ASML, the Dutch manufacturer of chipmaking equipment, suggests a new boom may be on the horizon at long last.

The $304bn company has successfully navigated the post-pandemic chip glut and east-west tensions. ASML makes the advanced lithography machines used to manufacture high-end semiconductors. In a year in which smartphone and PC inventories are slowly being sold down, and utilisation of other semiconductor manufacturing capacity depressed, ASML increased sales 30 per cent, to €27.6bn.  

That reflects its privileged market position. With long-lead orders for its machines far outstripping its capacity to manufacture them, ASML could boost its shipments even in a soft year. 

Strong demand from China helped. Despite US-led efforts to limit the country’s access to the most advanced chips, China still accounted for 39 per cent of ASML’s fourth-quarter sales. China is importing older equipment as it positions itself to compete on less complex chips. Increasingly stringent regulations mean that ASML expects to lose about 10-15 per cent of its sales to China in 2024, contributing to a flattish forecast for the year ahead. 

Nevertheless, the company is betting — and investing — for a renewed chip boom in 2025. Fourth-quarter intake was about three times larger than analysts had expected. That underpins about half of 2025 revenues, thinks Andrew Gardiner at Citigroup. The majority of new orders relate to ASML’s newest “EUV” machines. These should expand gross margins by about 300 basis points to between 54 per cent and 56 per cent in 2025. 

ASML’s order boom will cheer investors eyeing the next cyclical upswing in the chip sector. Its customers believe they will need more capacity some 18 months from now. TSMC, the giant Taiwanese chipmaker, also sees the cycle turning. It reckons 2024 revenues will rise by up to 25 per cent — higher than analysts had been expecting — as demand for smartphones and PCs picks up.

Not all chipmakers are created equal, though. America’s Texas Instruments still sees a soft market ahead for its automotive and industrial semiconductors. 

At the foothills of a cyclical boom, its valuation looks attractive. On 25 times 2025 earnings, that multiple could well improve as the outline of the recovery comes into focus.

Moreover, ASML’s near-monopolistic position in advanced lithography surrounds it with a considerable moat, protecting profitability. Its kit is also essential to manufacture advanced AI-enabling chips, which gives it a strong long-term growth outlook. Even after a strong run, the shares have promise.