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Morningstar | Raising ASML’s FVE to $160 as EUV Insertion Approaches for Foundry Customers

ASML reported third-quarter results that were consistent with our expectations and offered positive commentary that echoed sentiments proffered by Lam Research a day earlier. Adoption of extreme ultraviolet lithography, or EUV, appears to be on track based on ASML’s 2018 and 2019 shipment targets of 18 and 30 tools, respectively. These tools will be initially leveraged in foundry settings at TSMC and Samsung for their 2019 iterations of 7-nanometer technologies for roughly 10 layers of processing. Given the current state of throughput and availability metrics for ASML’s EUV systems that appear more suitable for high-volume manufacturing, we are raising our fair value estimate to $160 per share. Nevertheless, we reiterate our view that current stock levels for narrow-moat ASML imply EUV penetration beyond what we deem feasible, particularly in memory.

Third-quarter revenue was EUR 2.78 billion, up 13.4% year over year and 1.3% sequentially. Equipment revenue came in at EUR 2.08 billion, up 14.4% over the prior year, while service revenue was EUR 695.5 million, up 10.7% year over year. Memory revenue rose 7.1% sequentially thanks to DRAM investments for technology migrations, mostly offset by a 9% decline in logic (includes foundry) sales versus the prior quarter. Over the next few quarters, we expect the latter logic segment to grow as TSMC, Samsung, and Intel invest in their respective leading-edge processes. ASML recorded the sale of five EUV tools at EUR 513 million. Positively, the dilutive impact of EUV tools on margins subsided somewhat as gross margins rose 480 basis points sequentially to 48.1%.

Management projects fourth-quarter sales to be EUR 3.0 billion, which implies an 8% sequential increase. We applaud the firm’s efforts to sustainably achieve 125 wafers per hour at numerous customer sites, in addition to availability in the high 80s. The next iteration of ASML’s EUV tool (NXE:3400C) is set to be launched in the second half of 2019 with throughput of 155 wafers per hour, which we think will allow greater insertion at leading-edge logic/foundry processes (12-14 layers). Meanwhile, the NXE:3400C may also be more viable for DRAM applications, though only for a handful of layers. We look forward to hearing more in-depth details on the firm’s EUV endeavors at its upcoming analyst day on Nov. 8.