Key implications for the semiconductor industry

ASML NASDAQ:ASML struggled in the first quarter and presents a warning for investors in the semiconductor sector. The caveat is that new orders have been weaker than hoped and have weakened the semiconductor industry’s outlook. A sizable portion of the new orders included cutting-edge EUV technology, but not enough to support the inflated AI-driven prospects.

This means that chipmakers’ results could be weaker than expected in the future and worse; guidance could also be weak and push the tech sector into a deep depression. Actions of actions like AMD NASDAQ:AMD AND NVIDIA NASDAQ:NVDA they are down from their highs, but are still substantially up this year and from last year’s lows, leaving them in a precarious position. Names like Intel NASDAQ: INTC, Taiwan semiconductors New York Stock Exchange: TSMAND SAMSUNG OTCMKTS: SSNLFwhich are more closely tied to ASML’s assets, are also poised to extend their recent declines.

ASML has a weak quarter but reaffirms guidelines

ASML had a weak quarter in the first quarter, with revenue down 21% from last year due to weakness in new and used equipment. Sales of new equipment fell 42%, while sales of used equipment fell 64%. The outlook for the second quarter is satisfactory, with sequential growth expected, but net bookings offset the impact. Net bookings fell 60% sequentially, suggesting caution among chipmakers.

The margin is discreet and stable compared to last year. Gross margin fell 40 basis points, but less than expected, generating better-than-expected bottom lines. GAAP of $3.31 beat consensus of $0.40, but may not be directly comparable due to forex conversion. The results were strong enough to support the dividend and dividend growth. The council announced the final payment for 2023 which will be converted to $1.86 with the EUR/USD exchange rate at $1.06.

The guidance is also satisfactory, but a significant breakthrough is expected in the second half of the year which may not occur. Second-quarter revenue is expected to accelerate to a range of $6.07 billion to $6.6 billion, with significantly stronger results in the second half. The full-year outlook was reaffirmed as stable compared to last year, with the caution that this is a transition year. The company expects to resume growth in 2025, driven by next-generation and AI technologies supported by the CHIPs Act (in the US) and demand globally.

ASML capital returns will continue to flow

ASML’s dividend yield is not high, and the payments may be irregular due to the distribution policy, but the payment is safe and reliable. The company pays out less than 35% of its profits and maintains a strong balance sheet.

Highlights from the first quarter balance sheet include a reduction in cash and assets offset by lower debt and liabilities, resulting in increased equity capital. Leverage is less than 0.35 times equity, total liabilities are less than 2 times equity, and liquidity is approximately 5 times higher. The cash flow and balance sheet allow for share repurchases, but there’s a problem. Buybacks have not made up for last year’s dilutive actions, and share counts are rising.

Analysts support this market, but may limit the upside momentum now that results and guidance are out. The trend in 2024 is positive, including numerous price target increases, upgrades and hedges initiated, but may have overestimated the timing of the foundry market recovery. Consensus is up 33% over last year and expects a 5% upside from pre-release action, around 10% with post-release decline, but unlikely to rise further.

The ASML struggles with resistance: a deeper decline is possible

Shares of ASML fell 5% in premarket trading following the first-quarter release. The move confirms that resistance at recent highs is strong and has the market ready to reverse. Critical support is near previous highs at $885 and may be tested soon. If support fails to hold at this level, the market could drop to $800 or lower. Such a move would create a value opportunity in this market and create a buying opportunity; the question is when the recovery in equipment sales will take hold.

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