ASML Holding NV

ASML Holding NV (NASDAQ: ASML) is a tech Company, which is also an innovation leader in the semiconductor industry. It is a manufacturer of chip-making equipment and engaged in the development, marketing, production, selling and servicing of semiconductor equipment systems, consisting of lithography systems.

Rationale for Valuation – Expensive at USD 639.22

• In 2021, the Company expects strong demand across markets drives and expected sales growth towards 30%, with gross margin between 51% and 52% and estimated annualized effective tax rate between 14% and 15%.
• The near-term outlook is highly uncertain and unstable.
• The Company’s Debt/Equity ratio for FY20 stood at 0.32x, which is higher than the industry median of 0.07x.
• Trading near a 52-week high, while on a trailing 12 months, the Company’s Price/Earnings, Price/Cash Flow, EV/Sales and EV/EBITDA multiples are significantly higher than the Semiconductors & Semiconductor Equipment industry multiples, reflecting overstretched valuations.
• From the technical standpoint, shares were trading below the short-term support level of 20-day (USD 643.22) simple moving average price, which reflects a downtrend in the stock and can decline further.

Key Risks

• Excessive competition in the industry could affect the revenue and profitability of the Group.
• Being a Technology Company, ASML needs to invest heavily in innovation and system maintenance and, any failure to do so will impact the brand royalty and may affect the Company’s financial performance.
• Macroeconomic headwinds are expected in the short run with the global spread of Covid.

Recent News

On 30 April 2021, the Company announced the divestment of its technical glass division of Berliner Glas Group’s to Glas Trösch Group (Swiss family-owned company).

Q1 FY21 Trading Update (as on 21 April 2021)

(Source: Company Website)

• The first-quarter sales were €4.4 billion, and gross margin stood at 53.9%, both are above the guidance.
• In Q1, the net bookings were €4.7 billion, while the customers were utilizing software upgrades and will increase the capacity.
• However, in Q1 FY21, the net income and EPS were slightly down from the previous quarter (Q4 FY20).

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (FY21E) (Illustrative)

Conclusion

In the second quarter of 2021, ASML expects revenue to be in the range of €4.0-4.1 billion.  In Q2 FY21, the gross margin will be around 49%, with R&D costs of €650 million and SG&A costs of €175 million. The Company also expects the 2021 annualized effective tax rate to be between 14% and 15%. Further, the Company expects 2021 revenue growth to be 30% (compared with the last year), supported by a secular growth driver (like 5G, AI and High-Performance Computing solutions). During the last three months, the Company saw a significant increase in demand across the product portfolio and all market segments. Meanwhile, Q1 performance was higher than the previous guidance. However, the prolonged impact of the Covid-19 outbreak continued to affect its financial results, plans, operations, outlook, goals, reputation, liquidity and stock price. Presently, the company is trading near its 52-week high, raising doubts about its upside potential at current prices. The stock made a 52-week low and high of USD 311.11 and USD 675.65, respectively.

Based on the headwinds faced by the Company, we have given an “Expensive” recommendation on ASML Holding NV at the closing price of USD 639.22 (as on 21 May 2021), and we will keep a close watch on the current market dynamics to reconsider our stance in the near term.

*All forecasted figures and Industry/Peers information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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