ASML: Fire And Supply Chain Woes Plague Shipments And Revenues (NASDAQ:ASML)

ASML (NASDAQ:ASML) is a company with such a high level of technology prowess and market dominance that it should be breezing through the vagaries of semiconductor stocks. Unfortunately, in the past 1-year (Chart 1), and particularly in the past 6-months Chart 2, that is not proving to be the case when compared to the S&P Technology Index (IXT).

Chart 1

Chart 2

I explained five problems ASML is dealing with in a February 1, 2022 Seeking Alpha article entitled “ASML: 5 Headwinds Continue To Plague The Company.”

In the six weeks since that article, ASML has been impacted with even more headwinds, which are discussed in this article.

Plummeting Revenues

My analysis suggests that the fire on January 3, 2022 has caused such significant financial disruption that ASML will miss Q1 2022 guidance.

Keep in mind that globally, ASML’s EUV systems for sub-7nm chips are priced at $175 million and DUV systems are priced at $75 million. My analysis shows that lithography revenues dropped 85% MoM in January 2022 and 65% YoY, as shown in Table 1.

ASML has a 100% share of the EUV system market, an 85% share of the ArF DUV immersion system market, a 70% share of the ArF DUV dry system market, an 80% share of the KrF DUV market., and a 25% share of the i-line system market. This is according to The Information Network’s report entitled “Sub-100nm Lithography: Market Analysis and Strategic Issues.”

I estimate that ASML sold zero EUV systems and just two DUV immersion systems, plus a few KrF DUV and I-Line systems. As a comparison, in Q4 2021, ASML sold 11 EUV systems and 20 DUV immersion systems.

Table 1 also shows that equipment billings from North American suppliers for the period 2015 to January 2022. January’s billings were -3% MoM and +25% YoY from January 2021. As a comparison, in December 2021, billings increased 69% YoY.

January’s billings from Japanese suppliers were +1% MoM and +69% YoY from January 2021. Thus for this period, Japan’s billings were less impacted.

Intensification Of Geopolitical Issues

DUV to China

With the intensification of geopolitical issues, some US lawmakers also proposed to restrict DUV lithography machines for a wider range of processes. On March 18, 2021, U.S. Senator Marco Rubio and Congressman Michael T. McCaul penned a letter to Gina Raimondo Secretary U.S. Department of Commerce requesting that China foundry SMIC’s Entity List rule be strengthened and rewritten to close dangerous loopholes that would allow nearly all sales to SMIC to continue without restriction. The letter focused on the sale of DUV lithography systems to SMIC by ASML.

“We ask that you work with the Dutch government to persuade them to block the ASML sales to SMIC.”

Just last week, a year later, on March 17, 2022. Rubio and McCaul wrote another letter to Commerce, demanding tougher protections MIC, warning of possible Beijing-Moscow coordination.

Neon Shutdowns

Ukraine’s suppliers of neon, have halted their operations. Ingas based in Mariupol and now in rubble, produced 15,000 to 20,000 cubic meters of neon per month for customers in Taiwan, Korea, China, the U.S., and Germany, with about 75% going to the chip industry. Cryoin, which produced 10,000 to 15,000 cubic meters of neon per month, and is located in Odessa.

But the most important issue facing the semiconductor industry is using Excimer lasers in DUV lithography systems as the light source, either at 248nm (KrF) and 193nm (ArF) dry and immersion. Even though the primary lasing gas is KrF and ArF, neon is used as a buffer gas. Fortunately for the semiconductor industry, DUV lasers are primarily sold by ASML, and use an excimer laser manufactured by Cymer. During operation, the excimer lasers require a periodic gas “refresh” to replenish depleted halogen gas and to remove byproducts of the excimer discharge which decrease system efficiency. This refresh is achieved through injects or completely through refills.

When the neon supply was disrupted by Ukraine incursion some years ago, Cymer undertook a program to minimize the use of neon in their lasers. Back in 2015, the Cymer achieved a 50% in gas demand without any light source performance or availability impact. The second-generation neon reduction for ArF systems provides up to 75% gas savings.

In addition, Cymer initiated an in-situ recapture and recycling program to reduce neon utilization, and supplies kits to customers.

Continued Poor Supply Chain Management

According to a recent comment by Peter Wennink, CEO of ASML,

“Chipmakers’ multibillion-dollar expansion plans will be constrained by a shortage of critical equipment over the next two years as the supply chain struggles to step up production.”

ASML has 700 product-related suppliers, of which 200 are critical. The most complex component of ASML’s equipment was the lens, made by German manufacturer Carl Zeiss.

But I noted in an October 24, 2021 Seeking Alpha article entitled “ASML: Too Inconsistent, Too Overbought To Recommend,” that Roger Dassen, CFO of ASML attributes part of the problem by stating in the company’s 3Q 2021 earnings call:

“In the process of increasing capacity, we experienced some issues regarding materials shortage in our supply chain.”

That article was five months ago and the problem persists. I blamed poor supply chain management/executive management for the problem.

I commented that this raises an important question. How could a company with a near-monopoly in its DUV product, making only 20+ systems a month, have problems with materials in a supply chain? When combined with the inconsistencies shown in Table 1, it is apparent that a problem with supply chain management exists.

To ASML’s credit, as of March 21, 2022, there are 268 Job Openings for supply-related positions, including several Supply Chain Manager in Netherlands and the U.S. At least they are finally doing something about this.

Investor Takeaway

The world is witnessing a slowdown in equipment sales that are impacted by ASML’s EUV deliveries. With no EUV shipments, semiconductor equipment companies are pushing out purchases of deposition and etch equipment from suppliers including Applied Materials (AMAT) and Lam Research (LRCX), according to The Information Network’s report entitled “Global Semiconductor Equipment: Markets, Market Share, Market Forecast.”

Table 1 above shows that Deposition and Etch equipment billings also decreased in January, and AMAT and LRCX are two of the leaders in these sectors. Inspection revenues, led by KLA (KLAC) with a 55% global share of the sector, increased.

The fire at ASML’s plant and continued supply chain shortages have wreaked havoc on the company’s revenues. Chart 3 shows that ASML’s stock has been below its 200-day moving average since January 2022.

Chart 3

ASML is poorly valued based on its PE Ratio (41.1x) (Chart 4) compared to the European Semiconductor industry average (30.9x).

Chart 4

Chart 5 shows Seeking Alpha’s Factor Grades, giving the company an F for Valuation but an A+ for Profitability.

Chart 5