A Look At ASML's Q1 Report

Semiconductor lithography machine producer and Watch List stock ASML (ASML) recently reported its first quarter results.

Business is still looking strong. Sales were up 91% from the year ago quarter. ASML moved 100 systems, which was well up from 62 in Q1 '22, but a bit down from 106 in the December quarter. 54% of those systems were EUV.

ASML also continues to deliver excellent financial results. Free cash flow, adjusted for growth capital expenditures, was $563 million, much better than the negative figure a year ago. Trailing twelve month free cash margin is close to 38%, which is well above my modeling. ASML is enormously cash profitable.

While business remains good, there is clearly a growth slowdown on the horizon. Net bookings for the quarter were "just" €3.8 billion, down from €7.0 billion in the year ago Q1 and (by far) the lowest bookings quarter in the past year. The company has moderated share buybacks quite a bit, repurchasing only €400 million worth of shares, compared to over €2 billion worth a year ago. Don't expect to see many more of these 90% sales growth quarters going forward!

But that's ok. We never modeled for sustained explosive growth. ASML's current backlog of close to €40 billion still exceeds its production capacity for the next year. The critical nature of semiconductors to modern life will only increase going forward. ASML still is a monopoly in EUV machines and a strong player in DUV. The semiconductor equipment market has always been hugely cyclical - this is nothing new.

Long-term, ASML affirmed its targets of €30 - €40 billion in 2025 revenue with gross margins between 54-56% (compared to its current 51%). Our modeling is well within that range. Additionally, the dollar-to-euro exchange rate continues to slide back into its more historic range (after a period of an unusually strong dollar), which boosts the dollar value of the company's euro-denominated sales, profits, and cash flows. Taking all of this into account, I'm raising the fair value estimate to $764 from $728. The stock still looks slightly undervalued, but not enough to dive in quite yet.