Blue Chips

What’s going on?

Chip equipment maker ASML gave a knockout quarterly update on Wednesday.

What does this mean?

The demand for chips in smartphones, computers, and data centers has been dragged down by the sluggish global economy, but ASML has managed to dodge the worst of it so far. See, the company’s the one and only purveyor of the complex machines that chip giants like TSMC, Intel, and Samsung need to make the most advanced chips. And those all-important customers aren’t keen to cut back: after all, the wait time for these machines is actually longer than the expected length of the recession, so they need to make sure they’re well-equipped for the rebound that’s predicted to hit later this year. ASML won’t be complaining: the firm reported an unexpectedly strong profit last quarter, and said it expects sales to grow over 25% this year.

Why should I care?

The bigger picture: Bargaining chips.

ASML has a $45 billion gold mine of backlogged orders, so that sales outlook doesn’t seem too far-fetched. But every gold mine comes with a few hazards: in this case, there’s the US’s ban on sending cutting-edge chip machines to China. But luckily for ASML, the equipment it ships to Chinese firms is generally less advanced technology that isn’t under embargo, which explains why the firm believes the restrictions will only dent its backlog by 5%.

For markets: Shape up or chip out.

The chip industry isn’t out of the woods yet, but it looks like it might be heading in the right direction: now that China’s re-opening and artificial intelligence is on everyone’s lips, some analysts think the sector will avoid hitting the lows of a few months ago. And the forward-looking stock market’s cottoned on to that too, with an index that tracks chip colossuses jumping 15% this year.

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Originally Posted January 25, 2023 – Blue Chips