ASML’s Q3: Bad technical error, worse earnings
Hi reader,
I hoped to have a relatively quiet earnings season in Q3, but my desires have been put to rest relatively fast. ASML’s Q3 earnings leaked one day ahead of schedule (due to a “technical error”), and they were not great (to say the least). The stock has plummeted more than 20% since its release, and it’s down 40% from the ATHs set just this year. Crazy for a +€200 billion market cap company, but this is normal when one considers markets are efficient (😅):
Looking at the quarterly numbers, you might wonder what was so bad regarding earnings. The company beat top and bottom line estimates and showed acceptable growth, but the problem came from the forward-looking commentary, which I will discuss below. After covering ASML for the last three years, I have consistently mentioned how “little value” there is in the company’s quarterly numbers. The reason is that the revenue we see today was booked a while ago, so it’s not a good measuring stick for the current demand environment (which is what the market cares about). Of course this would theoretically change if in the future the company manages to shorten lead times significantly and match revenue recognition with shipments, but in the meantime…it is what it is.
Some claimed that I only said this when quarterly numbers were rough, but they completely missed that they have absolutely no context; I’ve said this both when quarterly numbers were good and bad. The fact that ASML’s quarterly numbers are not all that relevant also stands true today when they were the only highlight of the release.
Many people tend to see market reactions like the one ASML suffered as overreactions (maybe because they can’t believe the market got it so wrong). While it’s highly likely that due to the current market structure (algorithms being responsible for a large percentage of daily trading), there can be a certain overreaction, we must also understand to what extent the drop is justified, so I’ll share some thoughts at the end of the article.
Without further ado, let’s get on with the article.
The summary table and some comments
Below, you can find the summary table with ASML’s quarterly numbers. As discussed above, I don’t think these numbers are all that relevant today (mainly because this revenue was booked a while ago, and the market is forward-looking), so I’ll directly jump into what’s important.
The only thing that’s probably worth mentioning about these results is cash conversion. ASML is seeing muted cash conversion created by two main headwinds:
Lower down payments created by a lower level of orders
Higher working capital created by the company stocking inventories to prepare for the next growth phase
Both these headwinds should, in theory, normalize once the company starts realizing the expected growth. Note that a while ago the scenario was exactly the opposite: ASML’s cash flows were inflated due to huge downpayments.