Chip toolmaker ASML expected to shine light on capacity and China challenges

By Toby Sterling and Nathan Vifflin

AMSTERDAM, July 14 (Reuters) - ASML, the biggest supplier of equipment used to manufacture AI chips, reports quarterly earnings on Wednesday looking to justify its chunky valuation and demonstrate how it will contend with U.S. moves to block exports to China.

The Netherlands-based business is Europe's most valuable listed company with a market capitalisation of €610 billion ($696 billion) after the AI boom helped to lift its share price by nearly 70% this year as memory chip makers such as SK Hynix, Samsung and Micron rush to add capacity.

Biggest customer TSMC, which makes Nvidia's chips, is also expanding while Intel's recovery and Elon Musk's TeraFab plans could add further demand.

EXPORT CONTROLS CLOUDING OUTLOOK

Clouding the outlook, however, is a proposed U.S. law requiring U.S. allies to align with export controls to curb China's ability to make advanced chips, with ASML named in the legislation.

The company has denied selling its most advanced EUV tools to China, which is forecast to account for up to 20% of ASML's sales this year through legal purchases of less-advanced DUV tools to make chips for automotive, industrial and electronic products.

ASML is forecast to report an 8.8% rise in second-quarter net profit to €2.61 billion on revenue up 14% at €8.8 billion, according to LSEG estimates, with analysts looking for an increase to the company's full-year revenue forecast of between €36 billion and €40 billion.

"We expect ASML to have a beat-and-raise earnings report,” said Mehdi Hosseini, analyst at broker Susquehanna, adding that all of ASML's capacity to the end of 2027 may already be booked.

Morningstar's Javier Correonero said that ASML's 2030 sales target of at least €44 billion now looks overly conservative. "It's very reasonable to assume this guidance is outdated," he said. "I forecast €60 billion in 2030 sales."

'CREATIVE WAYS' TO MEET CUSTOMER DEMAND

ASML is the only maker of EUV lithography systems, the huge $300 million machines needed to produce the tiny circuitry on cutting-edge chips. Each takes about a year to build, one of the factors that limit how quickly AI infrastructure can expand.

Chief Executive Christophe Fouquet said in April that ASML was doing everything possible to avoid becoming an industry bottleneck, as happened during the COVID-19 pandemic.

ASML, which aims to ship 60 EUV tools this year and 80 next year, has said it could theoretically ship up to 90 without adding physical capacity, though JPMorgan analysts have said they believe it could make as many as 110.

"Beyond the 90 we are looking at creative ways to help customers," ASML said in a statement to Reuters. Options include upgrades to older tools, faster machine assembly and quicker installation.

ASML says it has also secured extra supplies of parts that take a long time to produce, including lenses and mirrors from German supplier Zeiss and high-power lasers from Germany's Trumpf.

"We are fully prepared to meet ASML's EUV demand over the next three years," said Trumpf spokesperson Manuel Thoma.

Zeiss declined to comment on capacity, though the company has been expanding DUV and EUV optics operations.

MORE VALUATION UPSIDE OR HITTING A CEILING?

Some analysts cautioned that ASML's valuation looks stretched, with the stock trading at 49 times estimated 2027 earnings.

"We believe much of the upside is reflected in the current price and therefore maintain our 'hold' recommendation," said KBC analyst Thomas Couvreur.

Others said there is still room for a positive surprise because ASML has underperformed the benchmark Philadelphia Semiconductor Index so far this year.

"Strong results combined with further capacity expansion could support a catch-up," said ING analyst Marc Hesselink.

($1 = 0.8769 euros)

(Reporting by Toby Sterling and Nathan VifflinEditing by Adam Jourdan and David Goodman)