ASML’s announcement

ASML is a leading maker of semiconductor production equipment, based in the Netherlands.  Its specialty is lithography machines, which semiconductor makers use to transfer the design structure of their chips onto silicon.

When reporting 3Q2010 earnings on October 13, ASML said it anticipated December quarter order bookings to be over €1.3 billion.  Last Thursday, the company said it now expects the figure to exceed €2.0 billion.  This compares with new orders of €1.0 billion in the comparable period of 2009.

ASML made several comments about this recent rush of new business:

–it’s coming from all sectors of the market,

–the DRAM segment, which tends to lurch wildly between under- and over-supply, is on the downswing, but it’s milder than anticipated,

–demand for NAND flash is up, particularly for use in new devices (meaning tablets and maybe Chrome-OS netbooks–anything that uses “solid-state” storage), and

–decisions to build new fabrication plants, both by foundries and logic chip makers.

my thoughts

1.  ASML’s customers are highly capital-intensive.  Firms like this–at least the ones without a death wish–rarely, if ever, outspend their cash flow.  Most  times their spending will stay close to that level, however.  So it’s reasonable to conclude that chip makers have seen a large boost to their cash intake over the past couple of months.  Demand for their products is surprisingly strong.

2.  Consolidation in the chip making industry over the past decade has given the surviving, now much larger, chip makers a considerable increase in market power over suppliers.  This allows them to order at the last minute, three to six months in advance of needing new capacity.  I think it’s safe to conclude that semiconductor makers believe the recent upsurge will carry over well into 2011.  Yes, orders can be cancelled, but Intel, Samsung, TSMC and whoever else is placing large new orders all believe this upturn is for real.

3.  I don’t think it’s an accident that these new orders are materializing at the same time as we are hearing reports of increasing consumer confidence and a surprising uptick in consumer spending.  Looking at stocks in general, I’m not sure whether it matters if the force ultimately behind the new ASML orders is consumer or industrial.  I suspect it’s an interaction between the two.  An employee sees his company upping its capital spending by 20% for 2011.  He concludes business is better, his job is (finally) safe and he might even get a raise.  So he loosens his purse strings.

Anyway, the ASML orders suggest that the economic upturn is reaching critical mass, where it is beginning to feed on itself–or reach “escape velocity,” as economists seem to want to characterize it.

4.  I take the ASML announcement as yet another piece of confirming evidence that the news for stocks will be good over the coming, say, six months.  I also think it means good things are in store for technology stocks and for ASML as a company.  ASML the stock?  …I don’t know.  Semiconductor production equipment companies are a highly volatile, highly cyclical bunch, that trade on second- and third derivatives of the actual orders news.  They also trade on anticipated timing of the peaks and troughs of the equipment cycle–and, again, far in advance of the actual events.  For me, this industry is better left to experts.