ASML Just Delivered Excellent News for Micron Stock Investors
Key Points
ASML is now taking orders into 2030 and says supply has exhausted demand through 2028.
Micron is a major customer of ASML and its EUV machines are needed to make HBM4 chips.
Chip stocks have pulled back, setting up a buying opportunity for quality stocks like Micron and ASML.
ASML (NASDAQ:ASML) reported third-quarter earnings Wednesday morning, and the news should reassure investors worried that the AI boom might be slowing down.
Revenue jumped 55% to 11.66 billion euros, which was slightly below estimates at 11.72 billion euros. The stock also fell 4% on Wednesday, in line with a broader sell-off in the tech sector on a hotter-than-expected Consumer Price Index (CPI) reading. On the bottom line, its earnings per share surged from 5.48 euros to 12.93 euros, well ahead of the consensus of 10.76 euros, a bullish sign.
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Gross margin in the quarter expanded by 51.6% to 57.5%, and with operating expenses nearly flat, the operating margin expanded from 32.8% to 44.4%.
ASML also raised its full-year guidance from 43 billion-45 billion euros to 44 billion-45 billion euros, and it expected even stronger results for the fourth quarter, with revenue of 14.2 billion-15.2 billion euros.
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The growth story is heating up
ASML and other semiconductor capital equipment stocks have been slow to capitalize on AI demand because ASML's lithography machines, used to manufacture semiconductors, are downstream of chip demand.
ASML's machines are big-ticket items, and the companies that buy them want to ensure there is sufficient demand to justify the purchase. On that front, ASML's backlog is strong and getting stronger as CEO Christophe Fouquet said, "Our customers increase their short-and medium-term equipment demand forecasts with us, driven primarily by their views on the size and duration of AI-related investment. In light of their demand visibility, some customers are expressing an interest in placing orders with us for 2029 and 2030."
The company also said that its supply won't meet demand in 2027 and 2028, and it's aiming to expand its capacity beyond the 30% expansion it already forecast.
Why it's good news for Micron
ASML's comments are further evidence that the bottleneck across the semiconductor industry will last for at least a few more years, as the lithography machines it sells are crucial to expanding chip manufacturing capacity.
ASML is the world's only maker of extreme ultraviolet (EUV) lithography machines, which are used to make the most advanced chips. The memory chip shortage has lifted Micron (NASDAQ:MU) and peers like SK Hynix, Samsung, and Sandisk.
Micron is a key customer of ASML, and the memory industry is shifting to making newer generations of high-bandwidth memory (HBM) like HBM4, exclusively on EUV, which means that tight supply for ASML machines is likely to push out memory chip expansion further, and that's good news for Micron.
Will chip stocks bounce back?
Chip stocks have gotten routed this week on concerns about rising interest rates, funding the ongoing AI build-out, and weakness in South Korea as the KOSPI, the South Korean benchmark index, has fallen for seven days in a row.
However, the companies that make up ASML's top customers are well-funded and will be able to purchase its machines, regardless of interest rates or related factors.
The companies investing in AI see it as close to existential and believe that success in AI is crucial to their future, as falling behind competitors could lead to them getting disrupted.
For Micron, the biggest question facing the stock is what the shape of the cycle looks like. What determines when it peaks is supply and demand, as well as the growth of AI spending.
Data points from peers like ASML continue to indicate that the AI sector will be supply-constrained for at least the next few years. That shows both that AI growth would be even faster without supply constraints and that shortages for products like memory chips will keep prices elevated.
While the chip sector will remain volatile, Micron and ASML are well-positioned to grow over the coming years, and that should eventually be reflected in their stock prices.
Jeremy Bowman has positions in ASML and Micron Technology. The Motley Fool has positions in and recommends ASML and Micron Technology. The Motley Fool has a disclosure policy.