Bulls and bears have answered their respective calls to arms and are really going at it in the semiconductor and equipment sectors. On one hand, Apple (Nasdaq:AAPL) can't seem to find a saturation point for iPhones and iPads, and follow-on offerings from the likes of Samsung are also doing well. Everywhere you look there are more and more chips going into more products and consumer spending has picked up nicely from the depths of the recession.

Tutorial: Investing Concepts

On the other hand, the Tohoku earthquake has thrown the production side of chips into chaos. What's more, there's the twin notions of "sell in May and go away," and the idea that chip and equipment stocks have already had their runs and are due for a run of underperformance.

That is the scenario swirling around ASML (Nasdaq:ASML) these days, as the world's leading lithography equipment company reports its earnings.

An OK Quarter to Start the Year
Given the push-pull surrounding the industry maybe it's only fitting that ASML's results would be a mix of good and bad news. On the positive side, ASML's reported sales were a little bit ahead of expectations. Sales dropped 5% from the fourth quarter, but nearly doubled on a year-over-year basis, as shipments slipped a bit but prices stayed strong. (For more, see Everything Investors Need To Know About Earnings.)

On the profit side of the ledger, ASML did OK on gross margin, seeing only a slight sequential slip. Operating margin slippage was a little worse (about 140 basis points), but a little better than most analysts expected. Although the company reported what looks like a strong EPS beat, a lot of the juice in the bottom line came from an unusually low tax rate - normalizing that rate results in a much more modest outperformance.

A Dicey Outlook
Bears are definitely going to focus on the company's order outlook. Order intake was really weak on a sequential basis (down about two-thirds), due in large part to the disruptions around the earthquake. While its true that the fabs for major customers like Intel (Nasdaq:INTC), Texas Instruments (NYSE:TXN), Taiwan Semiconductor (NYSE:TSM) and Samsung are a long way from Japan, the earthquake has disrupted the whole supply chain. After all, why rush to get a lithography system if you cannot get the other equipment you need for a new line?

On a more positive note, ASML's guidance for the second quarter suggests that business ought to rebound in relatively short order. What's more, ASML may see some incremental pick-up in business if the longer-term disruptions from the earthquake impair its two largest competitors - Nikon (Nasdaq:NINOY) and Canon (NYSE:CAJ). Along those lines, it's also worth noting that the company's backlog is still at a historically high level and the ASPs are holding up nicely. That is also good news for ASML suppliers like Cymer (Nasdaq: CYMI).

The Bottom Line
Even though ASML is the leading lithography company in the world, and lithography is about one-fifth of the total spend on a fab, that has never been able to surmount the inherent cyclicality of the semiconductor equipment business. That's a common problem in the space, as Applied Materials (Nasdaq:AMAT) has tried to find ways to tamp down the cyclicality in its model and not been all that successful. (For more, see Earnings Cyclicality Exposes Profitable Trends.)

ASML, like Applied Materials, looks like it is too cheap relative to its backlog and the strong outlook for consumer electronics. Investors thinking about this name, though, should realize that there's going to be a lot of volatility as the chip bulls and bears battle it out. For those who can see paper losses of 10 or 20% and not be bothered it's a fine idea, but investors who get nervous at the idea of a few stretches of red in their portfolio might be happier in other sectors.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  3. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  4. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  5. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  6. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  7. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  8. Stock Analysis

    The Biggest Risks of Investing in Netflix Stock

    Examine the current state of Netflix Inc., and learn about three of the major fundamental risks that the company is currently facing.
  9. Stock Analysis

    What Seagate Gains by Acquiring Dot Hill Systems

    Examine the Seagate acquisition of Dot Hill Systems, and learn what Seagate is looking to gain by acquiring Dot Hill's software technology.
  10. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  1. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  2. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  3. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  4. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  5. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  6. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!