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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Head of Fixed Income Strategy
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Earnings: ASML is mixed on China risk; can Tesla sustain gross margin
Peter Garnry
Chief Investment Strategist
Summary: ASML Q1 results were better than expected and even Q2 revenue guidance was above estimates, but regardless of this investors pushing ASML shares down by 3% as comments about mixed demand signals and the risks related to China seem to be the focus. However, the short-term noise around these risks should be ignored by investors as the long-term demand picture looks strong. Tesla is the next important earnings release expected to report tonight after the close. Investors will be focusing on Tesla's gross margin target of 20% in the light of recent price cuts and then of course the 2mn target for 2023 deliveries.
Investors should ignore short-term noise in ASML
ASML, which is the world’s largest semiconductor manufacturer of advanced lithography machines, has reported better than expected Q1 2023 results with both revenue and gross margin exceeding estimates. Q2 revenue guidance of €6.5-7bn is coming out above estimates of €6.4bn and the ASML is reiterating their long-term goals of revenue around €44-60bn by 2030 with a gross margin between 56-60% up from revenue of €21.2bn in FY22 and gross margin of 50.5%.
The long-term goals are set based on their reading that their product portfolio is well aligned with customers’ roadmaps of new products over the coming 8 years, and then also the megatrend of more computer chips needed for everything such as electronic consumer devices, electric vehicles, data centers for storage, AI computing, and general automation for manufacturing and the services sector. In addition, the war in Ukraine and the expected doubling of military spending in Europe on different military equipment will also increase demand significantly for computer chips going forward.
However, the market is a bit more lukewarm on ASML’s Q1 results with the share price down 3%. It seems investors are focusing on two risks in ASML’s communication. The first risk is related to this sentence in the press release “We continue to see mixed signals on demand from the different end-market segments as the industry works to bring inventory to more healthy levels”. While this is arguably a risk to revenue it is also a short-term risk and not something that should impact the value of ASML. The second risk is related to China in which the CFO says the company is awaiting the Dutch government’s final decision on whether to follow US demands and begin curbing semiconductor equipment sales to China. The Chinese market is currently 8% of total system sales and 20% of the order backlog.
Tesla cuts prices again ahead of Q1 earnings
The big earnings focus today is naturally Tesla, which remains the most traded stock in the world, and has mustered excitement this year as the carmaker has cut prices multiple times. Tesla even cut prices again yesterday ahead of its Q1 earnings which are released tonight after the US market close. Several sell-side analysts are worried that Tesla’s aggressive price cuts are signalling that it wants to keep demand high so lower inventories again that have been rising for several quarters now. Analysts also worry that Tesla cannot maintain its target of 20% gross margin on its cars unless it increases its factory efficiency. Our estimate is that Tesla will be able to keep margins close to the 20% as lithium carbonate prices are collapsing in China (see below) which is the main input cost for lithium-ion batteries.
Besides the gross margin on its cars investors will focus on Tesla’s demand outlook and will be hoping for a recommitment to the 50% growth in deliveries this year to 2mn cars. Tesla delivered 422,875 cars in Q1 which means that Tesla must deliver 525,700 cars on average in the next three quarters to hit 2mn cars which would equate to around 63% y/y growth rates in deliveries in those three quarters. It is a high bar but lower prices on electric vehicles seem to have increased demand quite a bit across many markets. Europe’s car sales also rose to a 2-year high in the previous month suggesting demand is looking solid. Analysts expect Tesla to report revenue of $23.4bn up 25% y/y and estimates are expecting Q2 revenue of $24.8bn up 47%.
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