ASML is one of the largest suppliers to chipmakers including Samsung, Intel and TSMC, and is seen as a bellwether for the chip sector.
ASML’s reported results for Q119, which came in better than market consensus. The beat is a function of higher than expected sales and gross margin along with slightly lower operating expenditure.
ASML also maintained its mid and long term targets of 13 billion euros in sales by 2020 and annual revenue between €15 – €24 billion through 2025, with demand for chips for artificial intelligence, connected cars, and 5G phones and networks among the driving forces.
Following Q119 results, we maintain our buy recommendation on the stock and increase our price target from €167 to €200. This is a result of increasing our EBIT margin estimate for 2020 to 30% from 28% in line with reduced macroeconomic headwinds. Global macro risks have been reduced and ASML should benefit from any economic tailwinds.
We continue to like ASML. What is most attractive about this company is that management is expecting growth to really kick in post 2020 when the company expects to see strong demand for its Extreme Ultraviolet Lithography (EUV) technology.
The positive outlook will also be a result of technology drivers such as 5G communications, automotive, artificial intelligence and data centers, trends in DUV systems revenue and Holistic Lithography and installed based management and Applications revenues.
ASML was always a top holding in the CC Euro Equity Fund and we continue to believe in the long-term story of the Group. ASML shares are up 35% YTD and 230% over 5-years.
Dividends
Proposal submitted to the 2019 AGM to declare a dividend in respect of 2018 of EUR 2.10 per ordinary share. This is a 50% increase versus last year (for a total amount of approximately EUR 0.9 billion).
2020 outlook
ASML models an annual revenue opportunity of €13 billion in 2020 and annual revenue between €15 – 24 billion through 2025.
Risks
ASML regularly exhibits above-average volatility. We have captured this factor in the discount rate. However, investors should be aware of this fact.
ASML is practically a monopoly in the sector, our base assumption is that ASML maintains the current technology gap, thus making competition unfeasible. This assumption would be at risk if an alternative technology disrupts the current status.
Conclusion
We are comfortable holding ASML in a well-diversified portfolio. It is well positioned to continue to benefit from further growth as global economic growth continues to remain supportive.
ASML has a strong set of financial statements and we expect the company to continue strengthening its position in years ahead.
About ASML
ASML is a Dutch company and currently the largest supplier in the world of photolithography systems for the semiconductor industry. The company manufactures machines for the production of integrated circuits (ICs), such as CPUs, DRAM memory, flash memory. The company is a component of the Euro Stoxx 50 stock market index.
This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri. For more information visit, https://www.cc.com.mt/ . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.