Interactive Investor

Europe’s biggest tech company slumps after missing forecasts

It’s been one of the best-performing large cap shares of recent years, rising in line with many of the American giants. But its latest results are disappointing. Graeme Evans explains why.

17th April 2024 15:59

by Graeme Evans from interactive investor

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ASML logo on a smartphone Getty

Europe’s largest technology stock and a key holding of Scottish Mortgage Ord (LSE:SMT) Investment Trust today put the brakes on its share price momentum by revealing orders short of hopes.

Netherlands-based ASML Holding NV (EURONEXT:ASML), a leading supplier to the semiconductor industry, lost about 6% of its value after its second-quarter sales outlook came in some 8% short of analyst forecasts.

Shares remain a third higher so far in 2024 amid expectations of an upturn in the cycle into 2025 and 2026, fuelled by the energy transition, electrification and AI.

Chief executive Peter Wennink wrote in the recent annual report: “The semiconductor industry is expected to double somewhere in the next decade, as compared with today.

“Our task in 2024 is to reflect on our organisation and capabilities and prepare for the rapid growth that is expected to come, while managing increased cost pressures.”

He said in the report that the semiconductor industry is currently working through the bottom of the cycle. The downturns of the last 30 to 40 years have been for two to three years, with the present downturn beginning in the second half of 2022.

Wennink stuck by those comments in today’s first-quarter update by forecasting an improved second half of the year. He added: “We see 2024 as a transition year with continued investments in both capacity ramp and technology, to be ready for the turn in the cycle.”

First-quarter sales of €5.3 billion (£4.5 billion) were at the midpoint of guidance on a gross margin of 51%. The projection for the second quarter of €5.7-€6.2 billion came in below the consensus of €6.47 billion.

Bookings of €3.6 billion in the first quarter were also short of expectations, but UBS thinks over €4 billion in the following three quarters is “likely achievable” to meet the company’s mid-point 2025 net sales target.

ASML is targeting annual sales of between approximately €30 billion and €40 billion in 2025, with a gross margin between approximately 54% and 56%. For 2030 it believes there’s an opportunity to reach €44-€60 billion and a 56%-60% margin.

Alongside this, it expects to continue to return significant amounts of cash to shareholders through a combination of growing dividends and share buybacks.

UBS recently upgraded its price target to €1,035 compared with this afternoon’s price of €865. Bank of America highlighted a valuation of €1,100 following today’s update.

Scottish Mortgage first took a stake in 1996 and now has 8% of its assets invested in the former Philips and ASMI joint venture, making it the joint largest holding alongside NVIDIA Corp (NASDAQ:NVDA).

It describes ASML as “probably the most important company that nobody has heard of”.

Scottish Mortgage added in last year’s annual report: “The semiconductor industry depends on ASML’s exceptional engineering skills to produce cutting-edge chips, and AI is just one driver of the strong demand we anticipate over the next decade.”

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