Semiconductor equipment provider ASML(NASDAQ: ASML) is off to a rough start this year. Demand is muted, particularly for equipment that doesn't use extreme ultraviolet lithography.
ASML's revenue sank 22% year over year to 5.29 billion euros in the first quarter. Net bookings and the number of new lithography systems sold slumped, as well. For the full year, the company expects total revenue to be roughly flat, compared to 2023.
ASML stock took a mild beating on Wednesday following the disappointing earnings report, with shares down about 7.4% at noon ET. While 2024 will be a year to forget for the semiconductor equipment giant, one key development should drive the company's revenue much higher over the next few years.
A battle royale in the foundry market
TSMC is the undisputed leader in the semiconductor foundry market. The company's market share currently tops 60%, and its leading technology makes it the only choice for companies like Apple that need cutting-edge manufacturing for custom chips.
Samsung is the distant runner-up, while Intel is plotting to take Samsung's place in the No. 2 spot by 2030. All three companies have laid out massive multiyear capacity expansion plans that are partially fueled by government subsidies.
TSMC recently received $6.6 billion in funding from the CHIPS and Science Act, which will be used to partially fund a $65 billion investment in new facilities in Arizona. Samsung will get $6.4 billion in funding for a new facility in Texas, which will require investments of more than $40 billion.
Intel was awarded the biggest prize of the three, with $8.5 billion in direct funding and $11 billion in federal loans. The chip giant plans to invest $100 billion in the U.S. over the next five years, with additional investments overseas.
On top of the new EUV equipment many of these facilities will need, Intel is an early adopter of ASML's High-NA EUV systems. The company is currently installing one of the $380 million machines and plans to use the technology for high-volume production on the Intel 14A process node. Intel 14A is expected to enter initial production in 2026.
Growth to return in 2025
ASML generated 27.6 billion euros in revenue during 2023 and expects to produce a similar figure this year. 2025 is when ASML sees business picking up, although unpredictable economic conditions could swing the company's revenue up or down by billions of euros.
For 2025, ASML is targeting revenue of between 30 billion euros and 40 billion euros. The low end of that range represents modest growth, while the high end represents growth of about 45%. Looking even further ahead, ASML expects to generate between 44 billion euros and 60 billion euros in 2030.
While 2024 will very likely be a bump in the road for ASML, part of the reason behind the stock's post-earnings decline could be valuation. ASML is valued right around $350 billion, which puts the price-to-sales ratio at roughly 12. Based on the average analyst estimate for full-year earnings, the stock trades at a price-to-earnings ratio of 44.
While ASML has a monopoly in the EUV lithography market, an elevated valuation leaves little room for error. If it starts to look like the company will fall short of its 2025 target, the stock could be in for a major correction.
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Timothy Green has positions in Intel. The Motley Fool has positions in and recommends ASML, Apple, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
