ASML plays the very long chip game



  • A plan to boost manufacturing capacity for cutting-edge tools comes just as chip makers are slamming the brakes on spending

ASML has one of the best spots in a temperamental industry. A lousy year or even two is no reason for the Dutch maker of chip-manufacturing equipment to shelve some ambitious expansion plans.

Business isn’t great for semiconductor manufacturing gear right now—or at least it isn’t going to be. Chip makers are pulling back on their capital-spending plans quickly as their own businesses get hit by slumping demand in key markets such as PCs and smartphones. There is even some cooling in the once hot data-center market. Semi, the chip-tool industry’s main association, projected in late September that spending on fab equipment would total $99 billion this year—a record, but 16% below the forecast it had issued less than three months prior. For 2023, the association projects a 2% decline.

This might seem an odd time for a company like ASML to rev up its production plans. At an analyst meeting on Friday, the company projected its own annual capital expenditures would hit €1.5 billion, equivalent to $1.55 billion, by 2025—a 50% jump from the target it gave a year ago. The spending is intended to fund a significant increase in production capacity. ASML now plans to produce about 90 units of its high-end EUV lithography tools in 2025, 50% more than it expects to produce next year.

That EUV projection is particularly noteworthy given how difficult the machines are to make. EUV refers to the extreme ultraviolet light used to power the lasers that etch circuitry into chips. The circuitry produced by EUV machines allows chip makers to produce smaller processors that consume less energy—a key to allowing semiconductor companies to continue to advance their designs as principles such as Moore’s Law hit physical limitations. But ASML has natural limitations of its own: The lenses alone for its EUV machines come from a single supplier and can take 12 months to produce.

A radical boost in production capacity, therefore, doesn’t come easily or without risk in the highly cyclical market for chipmaking gear. But ASML has some big advantages. It is the world’s only producer of EUV lithography tools, and those tools are vital for chip makers such as Taiwan Semiconductor Manufacturing, Intel and Samsung to remain competitive at the so-called leading edge of manufacturing. Even chip makers that are reducing capital expenditures elsewhere are unlikely to cancel their ASML orders for fear of being sent to the back of the line: The company’s backlog now totals €38 billion, or nearly two years of revenue at its current run rate.

ASML also told analysts on its earnings call last month that new export restrictions that limit the sale of advanced chip-making gear to China will have minimal impact, as the company has “more than sufficient demand for these systems elsewhere globally as demand continues to exceed supply." In fact, the growing politicization of the chip business could even help the company as the U.S. and Europe invest in building up domestic chip-making capacity, creating a need for more EUV tools.

Wall Street therefore sees ASML’s leap of faith as low-risk. In a report Monday, Pierre Ferragu of New Street Research said ASML is one of the few companies “with the visibility and competitive position required to be able to confidently issue such an outlook." Mehdi Hosseini of Susquehanna upgraded the stock to a positive rating on Monday, saying that ASML’s long lead times can “overcome the looming ’23 recession." Through Monday, ASML’s Dutch-listed shares had jumped 17% since the company first issued its updated long-term outlook on Thursday, breaking the stock out of a pattern that up to that point had mirrored the 37% decline of the broader PHLX Semiconductor Index.

This is one chip stock worth seeing the light on.

This story has been published from a wire agency feed without modifications to the text

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