Wars typically dislocate market valuations and supply chains across many industries; in today's environment, the main clash is between two leading economies. While not a physical war itself, the United States and China are battling in what is being called the 'Chip War.'
This conflict is a race where the winner will have a larger share of control in global chip and semiconductor technology and supply chains, a valuable position recognized after the COVID-19 disruptions. A chip shortage during 2021-2022 caused several players in the economy to suffer, as well as consumers.
As a result of these bottlenecks within the chip and semiconductor supply chain, lead times for anything dependent on these technologies (which is pretty much everything) rose to stratospheric levels.
Subsequently, margins and pricing power increased for the firms providing these materials, which can begin to explain the sector's massive outperformance during the past twelve months.
The VanEck Semiconductor ETF (NASDAQ: SMH) rose by as much as 51.8% during this period, leaving the SPDR S&P 500 ETF Trust (NYSEARCA: SPY) behind by nearly 30.0%. ASML (NASDAQ: ASML) is the perceived winner in the coming wave of benefits for the industry.
Earnings Guide the Future
ASML is Europe's most valuable technology company and a key player in the global supply chain and capacity for chips and semiconductors, second only to Taiwan Semiconductor Manufacturing (NYSE: TSM).
Second quarter 2023 earnings results are out for the European giant today, and analysts were blown away by the rate of increase within orders. Posting a 4.5 billion Euros ($5 billion U.S.) order bookings from April to June, ASML reports a massive 20% advance in orders backlog from just a month prior. What has happened to spike such a considerable advance in demand?
As China slaps on its newer export curbs on critical metals necessary to produce chips and semiconductors, most - if not all - manufacturers in China are getting ahead by stocking up on needed inventory.
This translates into a massive wave of orders for ASML, as when these curbs take effect, the supply and pricing dynamics will be unrecognizable from today's stance. As ASML is the leader of lithography technologies in the world, China is looking to get ready to gain the tools necessary to secure its spot in the 'Chip War' by having access to production technologies.
Understanding that this demand is only the beginning of a more significant trend, management has guided full-year 2023 net sales higher than most expected. A 30% increase to end the year, assuming an accompanying margin expansion due to coming curbs, can be enough of a factor to send the stock into new highs.
Analyst ratings had placed a consensus price target of $778.4, pointing to a potential 6% upside from today's prices. However, these targets may be lifted once analysts weigh the impact of today's results and guidance.
Market Perceptions
When investors compare ASML to a relatively close peer group, a few things will become apparent regarding where markets believe the stock may be headed. A valuation comparison is called for in this case because ASML is a one-off in its sheer size.
Using the forward price-to-earnings ratio rather than a traditional P/E, investors can look into the market perception of future earnings quality. ASML stock trades for a 30.7x forward P/E; this is why it is essential.
Other large-name competitors like Lam Research (NASDAQ: LRCX) and Applied Materials (NASDAQ: AMAT) trade significantly lower valuations. Some value investors may argue that this makes ASML the more expensive alternative; however, this can sign that markets value future earnings above competitors.
This makes sense, considering that management is looking for further growth amid these increasing demand environments. Now that the curbs are set to kick in, and China scrambles to get its hands on as much equipment as possible, investors have one last chance to consider riding the next wave in ASML.
The stock drops by as much as 3.7% during Wednesday's trading session, further amplifying the dip-buying opportunity for investors. Once markets digest the implications of today's results and bullish outlook, analysts may follow suit with further price target increases, which may be too late for potential buyers.
Considering that earnings today are nearly double those reported during 2021 when the stock reached a high of $895.93, the timing is the only thing standing between today's price and a new all-time high.
