ASML Upbeat on Logic Chips
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If there is one fault that some technology investors have it is that they are too optimistic, extrapolating trends into the future indefinitely. For those tech investors who are more grounded and who want to have a bellwether for the industry, there is one company that fits the bill. And no, that company is not Intel (NASDAQ: INTC), but a company that provides it equipment. Intel recently reported flat revenues and slowing demand from consumers in mature markets, although it is expecting a pickup in the second half of 2012.
For a look into the future course of the technology industry, investors need to look at the Dutch company ASML Holding N.V. ADR (NASDAQ: ASML). The company is the world's largest maker of equipment for manufacturing computer chips. Some of the company's major customers include Intel, foundries like Taiwan Semiconductor ADR (NYSE: TSM) and integrated device makers like Samsung and Apple (NASDAQ: AAPL).
ASML recently reported first quarter 2012 financial results showing a 28 percent fall in profits. Not good at first glance, but what was really important was the company's upbeat outlook, revising its projections for the first half of 2012. ASML said that demand for logic chips used in smartphones and tablet computers would continue to drive strong demand for its machinery. In contrast, demand for DRAM chips remained in a long-standing slump.
In fact, business is so good for logic chips at foundry companies such as Taiwan Semiconductor that it cannot keep up with demand. Just ask Qualcomm (NASDAQ: QCOM) about that. It recently gave weak guidance due solely to the fact that its partner Taiwan Semiconductor could not keep up with the demand. That it turn led Taiwan Semiconductor to state that 2012 capital expenditure would exceed last year's $7.3 billion.
The chief executive of ASML, Eric Meurice, specifically stated that mobile devices of all sorts would continue to drive demand for his company for at least the next six to nine months. This bodes well for shareholders in companies such as Korea's Samsung and, of course, red-hot Apple – the two biggest buyers of logic chips in the world – and perhaps even Nokia with its new Lumia Windows-based mobile phones.
A closer look at ASML's results over the past few years pretty well track what the technology sector has done. Two years – 2010 and 2011 – produced record results for the company as the industry made a strong recovery from the slump in 2009. This boom pushed up ASML's stock recently to a 12-year high.
So what does ASML's forecast for 2012 portend? A more subdued market overall for tech with the exception of smartphones and tablets. Just this month IT research firm Gartner says it expects global IT spending to grow only 2.5 percent this year to $3.7 trillion. This is down from its previous forecast of 3.7 percent growth due to cutbacks in public spending and the eurozone crisis.
So it will not be an exceptional year for the technology industry as a whole. But stock selections in the fast-growing smartphone and tablet PC sector should prove profitable.
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