ASML’s Resurgence: A Reflection of the AI Boom

A. ASML Holding NV’s Remarkable Performance:

The world of technology has witnessed a remarkable resurgence of ASML Holding NV (ASML), a Dutch semiconductor manufacturing equipment company. This resurgence is largely attributed to the burgeoning demand for artificial intelligence (AI) and its impact on the semiconductor industry.

1. Record High Stock Price:

ASML’s stock price has soared to record highs in recent months, reflecting investors’ confidence in the company’s growth prospects. In early 2023, ASML’s shares reached an all-time high, surpassing the €700 mark. This surge in stock price underscores the market’s optimism about ASML’s future.

2. Anticipated Strongest Week in Over a Year:

Analysts anticipate ASML to experience its strongest week in over a year, with a potential surge of up to 10%. This bullish outlook is driven by positive earnings reports and the company’s strategic positioning in the AI-driven semiconductor market.

3. Earnings Signal Renewed Demand for Cutting-Edge Machines:

ASML’s recent earnings report revealed a significant increase in demand for its cutting-edge machines, particularly from chipmakers seeking to produce advanced semiconductors for AI applications. This renewed demand is a testament to ASML’s dominance in the semiconductor manufacturing equipment industry.

B. High Demand Driven by Artificial Intelligence:

The resurgence of ASML is closely intertwined with the explosive growth of AI. AI’s insatiable demand for high-performance computing power has created a bottleneck in the supply of memory chips. To address this bottleneck, chipmakers are turning to ASML’s EUV lithography systems, which are essential for producing the advanced chips required for AI applications.

1. AI’s Impact on ASML’s Numbers:

The impact of AI on ASML’s financial performance is undeniable. In 2023, ASML reported a remarkable 40% increase in revenue, largely driven by the surging demand for its EUV lithography systems. This growth trajectory is expected to continue in the coming years, as AI continues to revolutionize industries worldwide.

2. High-Performance Memory Chips as a Bottleneck:

The development of AI algorithms and the increasing adoption of AI in various industries have created an unprecedented demand for high-performance memory chips. These chips are crucial for processing and storing vast amounts of data, enabling AI systems to perform complex tasks efficiently.

3. EUV Lithography Systems as a Fundamental Building Block:

ASML’s EUV lithography systems play a pivotal role in the production of high-performance memory chips. These systems utilize extreme ultraviolet (EUV) light to create intricate patterns on silicon wafers, enabling the production of chips with smaller transistors and higher performance.

C. Nvidia’s Dominance in Specialized AI Chips:

Nvidia Corporation (NVDA), a leading player in the AI chip market, has emerged as a significant customer for ASML. Nvidia’s specialized AI chips, manufactured using ASML’s EUV lithography systems, have been instrumental in driving the company’s exceptional stock performance in 2023.

1. Manufactured Using ASML’s Machines:

Nvidia’s AI chips are manufactured using ASML’s EUV lithography systems, highlighting the critical role ASML plays in Nvidia’s success. This partnership between the two companies has been mutually beneficial, with Nvidia’s demand for ASML’s machines contributing to ASML’s growth.

2. Exceptional Stock Performance in 2023:

Nvidia’s stock price has experienced a remarkable surge in 2023, reflecting the company’s strong financial performance and its leadership position in the AI chip market. Nvidia’s shares have outperformed the broader market, demonstrating investors’ confidence in the company’s long-term prospects.

D. Contrasted with ASML’s 2023 Challenges:

Despite its overall resurgence, ASML has faced challenges in 2023, including a slowdown in orders from major customers and the impact of high interest rates and inflation on consumer demand.

1. Slowdown in Orders from Major Customers:

ASML experienced a slowdown in orders from major customers in the second half of 2023. This decline was attributed to macroeconomic headwinds, including the ongoing trade tensions between the United States and China, which affected the global semiconductor industry.

2. Impact of High Interest Rates and Inflation on Consumer Demand:

The rising interest rates and inflationary pressures have dampened consumer demand for electronic devices, leading to a decrease in demand for semiconductors. This, in turn, has impacted ASML’s sales, as chipmakers have adjusted their production plans in response to the changing market dynamics.

II. ASML’s Revival: Driven by Next-Generation Technology

ASML’s resurgence is not solely dependent on the current AI boom; it is also driven by the company’s focus on developing next-generation technology.

A. Race to Produce 2-Nanometer Chips:

The semiconductor industry is currently engaged in a race to produce 2-nanometer chips, which will offer significant improvements in performance and power efficiency. ASML’s EUV lithography systems are essential for the production of these advanced chips.

1. Significance for AI Algorithms and Compute Speed:

The transition to 2-nanometer chips is crucial for the development of more powerful AI algorithms and faster compute speeds. These chips will enable AI systems to process vast amounts of data more efficiently, leading to advancements in various AI applications.

2. ASML Machines Required for Production:

ASML’s EUV lithography systems are the only machines capable of producing 2-nanometer chips. This strategic advantage positions ASML as a key player in the race to develop next-generation semiconductors.

B. Expansion of Chipmaking Facilities:

Major chipmakers, including TSMC, Intel, and Samsung, are investing heavily in expanding their chipmaking facilities. These expansions will require significant investments in new equipment, further driving demand for ASML’s EUV lithography systems.

1. TSMC, Intel, and Samsung’s Upcoming Plants:

TSMC, Intel, and Samsung have announced plans to build new chipmaking plants in various locations worldwide. These facilities will require ASML’s EUV lithography systems to produce advanced semiconductors.

2. Increased Demand for ASML’s Machines:

The expansion of chipmaking facilities by major players will lead to increased demand for ASML’s EUV lithography systems. This surge in demand will contribute to ASML’s continued growth in the coming years.

III. ASML’s Valuation and Growth Prospects

ASML’s valuation and growth prospects are closely scrutinized by investors and analysts.

A. Current Valuation Metrics:

ASML’s current valuation is relatively high, with the company trading at around 40 times next year’s earnings. This valuation is above its five-year average, reflecting investors’ optimism about ASML’s future growth potential.

B. Projected Earnings Growth:

Analysts project ASML’s earnings to grow significantly in the coming years. The company’s 2025 outlook indicates “very significant” growth, with earnings expected to more than double from current levels.

1. 2025 Outlook Indicates “Very Significant” Growth:

ASML’s management has expressed confidence in the company’s long-term growth prospects. The company’s 2025 outlook projects “very significant” growth, driven by the increasing demand for its EUV lithography systems.

2. Historical Levels When Considering 2025 Earnings:

When considering ASML’s projected earnings for 2025, the company’s valuation appears more reasonable. Based on these projections, ASML is trading at a forward price-to-earnings ratio of around 20, which is in line with its historical levels.

C. Comparison with AI Enablers:

Compared to other companies that are considered enablers of AI, ASML remains relatively cheaper. Based on a comparison of earnings growth ratios, ASML offers a more attractive valuation than many of its peers.

D. Concern Regarding Chinese Chipmakers:

One concern for ASML is the potential impact of Chinese chipmakers. In 2023, ASML experienced a surge in orders from Chinese chipmakers, which some analysts believe may have been driven by front-loading of demand. This could potentially lead to a decline in sales to China in 2024.

IV. ASML’s Transition Year: Limited Growth and Market Expectations

ASML’s outlook for 2024 is characterized by limited growth and cautious market expectations.

A. 2024 Outlook:

ASML’s management has indicated that 2024 will be a transition year for the company. While there are positive signs in the chip industry, the shape and pace of recovery remain uncertain. The company expects booking trends to remain volatile in the near term.

1. Positive Signs in the Chip Industry:

There are some positive signs in the chip industry that could support ASML’s growth in 2024. Demand for semiconductors is expected to increase as the global economy recovers from the COVID-19 pandemic. Additionally, the expansion of chipmaking facilities by major players could lead to increased demand for ASML’s EUV lithography systems.

2. Uncertain Shape and Pace of Recovery:

However, the shape and pace of recovery in the chip industry remain uncertain. The ongoing trade tensions between the United States and China, as well as the impact of high interest rates and inflation, could continue to weigh on demand for semiconductors.

3. Volatile Booking Trends:

ASML’s management has cautioned investors that booking trends could remain volatile in the near term. This volatility could make it difficult for investors to accurately forecast the company’s financial performance in 2024.

B. Market Expectations:

Market expectations for ASML are relatively muted, reflecting the uncertain outlook for the chip industry in 2024. Analysts are looking forward 18 months to see if ASML can sustain solid orders and deliver on its growth projections.

1. Looking Forward 18 Months:

Analysts are taking a long-term view of ASML, looking forward 18 months to assess the company’s ability to sustain solid orders and deliver on its growth projections. This timeframe allows for the potential impact of the current challenges in the chip industry to subside.

2. Importance of Sustained Solid Orders:

Sustained solid orders will be crucial for ASML to meet market expectations in 2024. The company needs to secure long-term contracts from major chipmakers to ensure a steady flow of revenue.

C. Impact of Intel’s Disappointing Forecast:

Intel’s disappointing forecast for 2024 has weighed on ASML’s shares, leading to a decline in the company’s stock price. This decline reflects renewed doubts about the chipmaker’s turnaround and the potential impact on ASML’s business.

1. ASML Shares Slip Amid Sector-Wide Declines:

ASML’s shares have slipped amid a broader decline in the semiconductor sector. Intel’s disappointing forecast has raised concerns about the health of the chip industry, leading to a sell-off in chipmaker stocks.

2. Renewed Doubts about Chipmaker’s Turnaround:

Intel’s disappointing forecast has renewed doubts about the chipmaker’s ability to execute its turnaround plan. This has led to concerns that ASML’s growth prospects may be impacted if Intel is unable to recover.

V. Tech Chart of the Day: Nasdaq 100’s Record Valuations

The Nasdaq 100 index has reached record valuations, with a growing number of components trading above $100 billion.

A. Nasdaq 100’s Strong Performance:

The Nasdaq 100 index has outperformed other major indices in recent years, driven by the strong performance of technology companies. This strong performance has led to a surge in the number of components trading above $100 billion.

1. Leading to Record Number of Components Over $100 Billion:

The Nasdaq 100 index now has a record number of components trading above $100 billion. This milestone reflects the growing dominance of technology companies in the global economy.

2. More Than a Third of Stocks with Market Values Exceeding $100 Billion:

More than a third of the stocks in the Nasdaq 100 index now have market values exceeding $100 billion. This concentration of wealth in a small number of companies highlights the growing inequality in the technology sector.

VI. Top Tech News

Stay up-to-date with the latest news in the tech industry.

A. OpenAI’s South Korea Visit:

OpenAI, the company behind the popular chatbot ChatGPT, is visiting South Korea to explore chip production and potential partnerships.

1. Exploring Chip Production:

OpenAI is exploring the possibility of producing its own chips. The company believes that customized chips could improve the performance and efficiency of its AI models.

2. Bret Taylor’s Investment in Sierra:

Bret Taylor, the former co-CEO of Salesforce, has invested in Sierra, a startup developing AI-powered chips for data centers. Taylor’s investment is a sign of growing interest in AI-specific chips.

B. Intel’s Disappointing Forecast:

Intel has issued a disappointing forecast for 2024, citing weak demand for PCs and data center chips. This forecast has raised concerns about the health of the chip industry.

1. Renewed Doubts about Turnaround:

2. Premarket Trading Tumble:

Intel’s shares tumbled in premarket trading following the release of its disappointing forecast. This decline reflects investor concerns about the company’s near-term prospects.

C. Nintendo’s New Game Console:

Nintendo has unveiled its new game console, the Nintendo Switch 2. The console features an 8-inch LCD screen and is expected to launch in 2024.

1. 8-Inch LCD Screen:

The Nintendo Switch 2 features an 8-inch LCD screen, which is larger than the screen on the original Nintendo Switch. This larger screen could provide a more immersive gaming experience.

2. Launch Expected in 2024:

The Nintendo Switch 2 is expected to launch in 2024. Nintendo has not yet announced a specific release date or pricing information.

D. xAI’s Fundraising Efforts:

xAI, a startup developing explainable AI (XAI) tools, is raising $6 billion from investors. This fundraising effort reflects the growing demand for XAI solutions.

1. Challenging OpenAI’s Dominance:

xAI is seen as a potential challenger to OpenAI in the field of AI. The company’s fundraising efforts could help it to develop more advanced XAI tools and compete more effectively with OpenAI.

2. Seeking $6 Billion from Investors:

xAI is seeking $6 billion from investors to fund its growth and development. This large funding target reflects the ambitious goals of the company.

E. Microsoft’s Video Game Division Layoffs:

Microsoft is laying off employees in its video game division, including Activision Blizzard. These layoffs are part of a broader cost-cutting effort by the company.

1. Affecting Activision Blizzard:

The layoffs are affecting Activision Blizzard, which Microsoft acquired in 2022. This is the first round of layoffs at Activision Blizzard since the acquisition.

2. Part of Cost-Cutting Measures:

The layoffs are part of Microsoft’s broader cost-cutting measures. The company is looking to reduce costs and improve profitability amid a challenging economic environment.

VII. Earnings Due Friday

No major earnings are expected on Friday.