Investors are wide-eyed about the future of this essential manufacturing stock
ASML Company (ASML -2.91%) has a large backlog, strong demand, but faces ongoing supply chain issues. Despite these challenges, this could be excellent long-term stock picking. In this clip from “3 Minute Stocks Updates” on Motley Fool live, recorded on May 25Motley Fool contributor Toby Bordelon discusses in depth some of the challenges ASML Holding faces today, but explains why the future of its stock looks bright.
Toby Bordelon: Holding ASML. Some people, our viewers, may be wondering what is this company? What are they doing? They are a manufacturing company. In short, they make the machines that semiconductor manufacturers use to manufacture their semiconductor chips. They are a maker for makers, if you want to think of it that way. Really solid company. They are one of the leaders in chip manufacturing equipment. There is a relatively new manufacturing methodology. Extreme ultraviolet lithography to get those very, very small chips there. They are the only EUV equipment manufacturer right now that may change in the future, but at the moment they are the only ones that exist. The generation behind it is DUV stuff, which a lot of people do. Some of their clients, Taiwan semiconductor (TSM -2.67%), Samsung (OTC:SSNLF), Intel (INTC -3.23%), the major chipmakers you know of, are all companies that look to ASML for their equipment. Now I want to look at just one aspect of the earnings report they just released to give you an idea of what’s going on. I hope this explains and shows you why you need to put quarterly reports in the context of the economy and not just think in isolation and in the short term. Let’s take a look at this. Here is their income statement for the quarter that ended last month, April 4. You look at this, the most recent quarter is on the right, the quarter of the previous year on the left. You look at this and say, wait a minute, sales are down. Is it a problem? I thought there was massive demand for semiconductor chips, why are sales dropping? What is the problem? You might think there is a problem. In the short term, I think that might be the case, but in the long term, it’s not really that bad. Because you look at the rest of the financial statements, especially the income statement, what’s going on there? You will notice something. You will notice this line called contract liabilities. That’s a year ago for the full year of 2021 versus 2020. Look there, you see it yourself, contract liabilities have gone up a lot. What is happening here? Well contract liabilities basically capture both the deferred revenue, the cash they’ve received they haven’t delivered the equipment yet or the firm orders and they haven’t delivered it yet and the payment that they received, both captured this Passives contract idea. You see this big increase and they break it down for us. We see quite a significant increase, especially the latter here, remaining the performance obligation. They have the money or they have unconditional rights until you get the money, a firm order. Lots of a big increase there. You take it all together and what’s really going on are supply chain issues. We see that the company has lower sales in this quarter, but an increasing backlog. You think about what is happening in the semiconductor industry. High demand, can’t make chips fast enough, can’t get them where they want to go. It just shows us that this is not a problem unique to a specific part of the industry. The entire industry is currently struggling to get things where they need to be. Chipmakers can’t do more insurance because they can’t get the equipment to make them fast enough. It all comes together in one. But the situation, you have declining sales with an increasing backlog that gives you hope for the future. This company, ASML, is targeting $5 billion in revenue for the next quarter. Above the first quarter, things seem to be improving. They’re going to start making some of those deliveries. I think the bottom line here is that you may be a little worried in the short term about declining sales, but the backlog is large, the demand is huge. Medium term, long term, you don’t really have to worry about where they are, I think.