Europe has an AI champion—the Dutch semiconductor giant that is the continent's most valuable tech firm and just hit a record high

ASML Holding NV’s rally to a record high this week illustrates how the chip equipment firm is cementing its place at the heart of the artificial intelligence boom. 

Europe’s most valuable technology company is on pace for its best week in more than a year, set for a 16% gain after earnings that offered one of the strongest signs yet that its cutting-edge machines — seen as a bellwether for the semiconductor industry — are back in high demand. 

“Nobody was expecting orders to come back so fast. The answer to that is in the high bandwidth memory business, and all this is driven by AI,” said Oddo BHF analyst Stephane Houri. “If you want to see some impact of AI in the numbers of ASML, this is where it is.

A resurgence in memory chipmakers’ spending commitments was key to lifting ASML’s bookings to a record in the fourth quarter. That was helped by a demand recovery around smartphones and computers, which require chips to store information. 

The need for high-performance memory chips — a bottleneck in realizing full AI potential, according to ASML CEO Peter Wennink — also adds urgency for chipmakers to book extreme ultraviolet (EUV) lithography systems, a fundamental building block of modern chip manufacturing made by ASML. It normally takes the company between 12 to 18 months to deliver an order of its flagship EUV system.

“There was an element of additional demand that even ASML did not quite expect,” said Societe Generale analyst Alexander Peterc. And that’s driven by “surging demand for AI infrastructure,” he added.

AI systems need specialized chips that can process vast amounts of data. Nvidia Corp.’s technology, manufactured using ASML’s machines, has dominated the field — the California-headquartered company’s stock more than tripled in 2023 and has continued to outperform. 

In contrast, ASML spent much of 2023 contending with a slowdown in orders from some of its largest customers, including Taiwan Semiconductor Manufacturing Co., as high interest rates and inflation dampened consumer demand. ASML gained 35% last year, lagging behind the Philadelphia Semiconductor Index’s 60% jump.

ASML’s revival in orders comes amid a race between major chipmakers to produce 2-nanometer chips, a next-generation technology that will make AI algorithms compute even faster. On top of that, ASML’s machines are required in a long list of chipmaking facilities that are about to open. Next year, TSMC’s facility in Arizona, Intel Corp.’s factory in Ohio and Samsung Electronics Co.’s plant in Texas will all be put into work.

On a one-year view, ASML’s shares appear expensive. It currently trades at 40 times next year’s earnings, well above the five-year average. But that ratio would come down to historical levels when 2025 earnings are taken into the consideration, a year that the Dutch company has repeatedly said will see “very significant” growth.

Gerrit Smit, manager of Stonehage Fleming’s $2.5 billion Global Best Ideas Equity Fund, said ASML remains cheaper than a pool of key AI enablers that he tracks, based on a ratio that factors in next three years’ of earnings growth.

One concern on ASML is tied to Chinese chipmakers, which rushed to ship in lithography tools last year ahead of export restrictions. Due to a front-loading of demand, sales to China may fall this year, Berenberg analysts said, even though they expected demand from the country to remain strong.

And as a “transition year,” 2024 is set to be a year of limited growth for ASML. The firm said it’s seeing positive signs in the chip industry, but the shape and pace of a recovery is unclear. Booking trends tend to be volatile, and achieving the rosy 2025 outlook requires more than one quarter of solid orders. While up on the week, ASML shares slipped Friday, amid sector-wide declines after Intel Corp.’s disappointing forecast. 

“We expect 2024 not to be fantastic, but the market is supposed to look about 18 months forward,” said Stonehage Fleming’s Smit.

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