Following the news that ASML reported strong Q1 2023 results;

Josep Bori, Thematic Research Director at GlobalData, a leading data and analytics company, offers his view:

“ASML’s Q1 2023 results and outlook were strong, despite the growing uncertainty caused by bans on chip technology exports to China and the overall tech sector backdrop, including softening consumer demand and headcount reductions.

“With strong revenue growth in Q1, albeit helped by an easy comparable, and a confident 2023 outlook, the company is very well positioned. Its extreme ultraviolet lithography (EUV) machines, capable of manufacturing the smallest chips (i.e., 7, 5, and soon 3-nanometer nodes), accounted for 54% of total system sales in Q1, higher than in Q4. However, quarterly bookings dropped 46% year-over-year, a further deceleration following the 11% decline in Q4. This likely explains why the company did not raise its full-year 2023 guidance (25% revenue growth) despite the strong Q1. That said, ASML’s manufacturing technology leadership places it front and center of any country’s artificial intelligence (AI) strategy, as advanced AI chips require this miniaturization level.

“Management’s outlook statement is balanced but slightly more negative than in Q4. In the last two quarters, they had indicated that customers expected a market rebound in the second half of 2023, so orders remained strong. This time around, while keeping the full-year guidance unchanged, management highlighted mixed signals on demand from the different end market segments and ongoing inventory corrections.

“However, given the industry context of negative double-digit revenue declines at Nvidia, Micron, and Kioxia, if ASML delivers on its 25% revenue growth target for 2023, the company will have weathered this downturn considerably better than its peers. This will strengthen its position as a top-quality semiconductor stock in investors’ minds.

“Investors’ confidence in ASML’s ability to deliver on its 2023 outlook will hinge on two factors: the specifics of the chip export bans adopted by the Dutch government in March and the containment of the banking crisis, which has claimed Silicon Valley Bank, Signature Bank, and Credit Suisse as casualties, and could spark a global recession. Management has indicated that it does not expect the additional export bans to have a material effect on the company’s financial outlook for 2023 or its longer-term scenarios, as announced at its investor day in November 2022. However, it is still unclear which products fall under the new restrictions or if any limits on servicing the installed base in China will be put in place, all of which have a significant bearing on its business outlook. That said, in the long term, end-user chip demand remains strong. Therefore, manufacturing tools’ demand will eventually shift from the restricted markets to other regions that ASML can serve.

“From a broader sector perspective, the fundamental question in the coming months is the sustainability of ASML, TSMC, Samsung, and Canon’s compliance with expanding US restrictions on the export of advanced chips and tools to China. Remaining neutral will become increasingly difficult for companies based in Taiwan, South Korea, the Netherlands, or Japan, despite the significant economic costs of not doing so.

“The US export ban on chip technology transcends the semiconductor industry. In GlobalData’s view, this is about AI dominance, which underpins what many call the fifth industrial revolution, and, ultimately, about global economic leadership in the next few decades.

“GlobalData report, “Artificial Intelligence (AI) Chips – Thematic Research,” predicts that the accelerating adoption of AI in commercial and military use cases will drive the global AI chips revenue at a compound annual growth rate of 30%, from $12 billion in 2021 to $130 billion in 2030.”