ASML Earnings Signal AI Demand Holding Strong

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1:19Bloomberg Tech is live from coast to coast with Caroline Hyde in New York and Ed Ludlow in San Francisco. This is Bloomberg Tech coming up. ASML says bookings for its most sophisticated chip-making machines remain resilient thanks to the AI boom. Plus a whirlwind of data center news and Microsoft cutting a fourth deal with N-Scale, among others, will break it all down. And Apple updates its top-of-the-line iPad Pro and other products with its own in-house chip. But first, ASML, the maker of EUV equipment, the most sophisticated chip equipment that then gets sent to key partners around China, but also around Asia.

2:01And they're showing strong bookings. Let's get the details of Bloomberg's equities reporter, Henry Wren. And what's so important is it's the EUV extreme ultraviolet lithography machines seem to be being still snapped up, even as China has to pull away eventually. Yes, so thanks for having me. And for this quarter, which is the market focus is this EUV orders number and has risen to the highest level since late 2023. A huge plus for investors. And that's why we've been seeing stock trading higher now. So we know that actually mainland China chip makers, they can't order EUV tools directly. They can access a less advanced tool called DUV.

2:44But it really is a sign that some other chip makers, including Samsung in South Korea, including TSMC in Taiwan, is stepping up. And to investors, it's an early sign that this rapid increase in AI infrastructure is actually translating to the orders that ASML has been seeing so far in this quarter. What's so interesting is the dominance of Asia as the demand flow. U.S. starting to pick up for ASML's equipment. But they're in the heart of the geopolitical tension right now. They must be exposed to concerns around rare earth metals, let alone an ability to have to pull away from selling into China.

3:24Yeah, indeed. A lot of discussions on rare earths in the morning as well. And ASML said that it has stacked enough rare earth materials for at least several months because we realized that the market has a lot of concerns regarding chip equipment makers reliance on those metals because analysts said that although in terms of the total material input for ASML, it just accounts for a very small amount, but it's still a very critical component for its most advanced EUV machines, as you mentioned, but also for its partners, for example, because ASML works with other partners for mirrors, for other components for EUVs as well.

4:07So it's a very important ingredient into the EUV machines. But so far, the company said that it hasn't seen major impact. Most valuable European stock, Henry Wren. We appreciate the breakdown on ASML. Let's stick with that very company and the broader AI conversation. Andrew Gardner is with us. He's Citi Research, head of European Technology Equity Research. and you have a buy rating on ASML. You have a price target of more than€1 ,000. What takes us there, Andrew? Good morning. Thank you for having me. Yes, we continue to be bullish on ASML and I'd say this morning's results and the orders in particular that you were highlighting with Henry just now are a step in the right direction in terms of the potential appreciation of this stock.

4:50I really think we've been on a journey over the last year in terms of resetting a base for 2026. And they have confirmed this morning that expectations are at a reasonable level. They don't want to yet go so far as to call out growth, but at least we're not going to decline next year. And I think that's removed one of the key uncertainties for the stock. And that's helped to get us to where we are today, just shy of 900 euros. In terms of further appreciation from here, It's all about the growth beyond 2026, in my view. And that really comes down to some of what you've been alluding to with the demand coming from the artificial intelligence players into the data center.

5:34Here, clearly, there's a lot of momentum in terms of the news flow. ASML management were highlighting that just recently on the conference call. It's not yet fully reflected in their order flow, but it's something that we expect to come in the future quarters. And so it's really that momentum that will drive the stock higher. I love that you say that, Andrew, because I pulled this part from your note, which I think was really important for our viewers, because in particular, you say, SML acknowledged basically the momentum in the chip industry and market more broadly. But this is not yet reflected in firm orders.

6:07And there's a growing disconnect in the industry between the myriad of AI chip deals being announced and the amount of spend committed to these equipment companies. When will it show up? Are you really confident that it will show up? Because many are questioning the absolute financing of some of these orders. Yeah, I think it's an absolute it's a critical question for this space. as has been talked about already this morning on this program. You're seeing all of these deals being announced by the likes of NVIDIA, OpenAI, committing to certain volumes at AMD and NVIDIA, the memory companies. And yet, ASML, sure, was a healthy order intake of€5 billion, but nothing too out of the ordinary for them.

6:54Certainly, they've had stronger quarters in terms of order intake. So I do think given the lead times in particular, we are going to need to see orders pick up in the coming quarters in order to support the future demand that's being talked about by the artificial intelligence sector in particular. For example, ASML on the EUV tools that you've already highlighted, their lead times are roughly 12 months. So even if you're ordering today in the fourth quarter, you're not going to get those tools until the fourth quarter of next year, ramping production into 2027. So the lead times are quite long and therefore the supply chain needs to be prepared for that ramp to come.

7:33Andrew, you don't cover the stocks in particular, but if you are thinking about an announcement coming from NVIDIA saying we're going to be there with thousands of chips ready by 2026 to be put into whichever data center that OpenAI has just asked for, and the AMD as well. Do you think the backlog is there that they've got them the inventory to be able to sustain the 2026 dates that we keep getting from these companies? So in terms of thinking through the supply chain, you take ASML as a critical supplier, the only one in the world who can supply the EUV tools that are necessary for many of these chips.

8:10They are close to but not quite fully booked for 2026 deliveries. That will be the case by the end of 2025, given that 12-month lead time. And so really, the capacity that is already planned to be installed next year, sure, there could be a little bit of upside, but we're already getting close to the limits. And really, as I described earlier, what you're playing for is the growth into 2027. ASML Management this afternoon here in Europe commented on the fact that they don't have perfect visibility because those orders aren't there yet, but they are acknowledging the growth in the industry, the demand that is coming, and they're trying to prepare themselves and indeed their suppliers to be able to make sure that they are not going to be a bottleneck into future years.

8:56What was so notable about this quarter just gone that they reported on for ASML was the 42 % exposure still to China in terms of revenue. How much smaller will that become eventually? Yeah, so they have called that out in terms of the expectation for 2026 and saying it's going to decline significantly, unquote, into next year. I would say on a year to date basis through September, they're at about 32 percent of system sales into China. As you point out, that was higher in the third quarter at about 42 percent. So they're still generating very strong business in China at the moment. They're just saying given the extended level of spend this year, last year, indeed the year before, that they think it should normalize into the future.

9:44At the moment, though, with the restrictions in the way that they are, the Chinese companies are ordering what they can. And so, yeah, we'll just have to see exactly how that pans out into 2026. The lead times for the type of tools that the Chinese customers are buying are not 12 months in the way that they are for EUV. They're much shorter, six months, perhaps even less in some cases. So, again, things could change as we look into 2026. Andrew, you cover ASML and the who's who of the European hardware sector. We appreciate you being on the show today. Andrew Gardner of Citi Research.

10:23Apple updated its top-of-the-line iPad Pro as well as its Vision Pro headset and the 14-inch MacBook Pro, rounding out a series of product refreshes all ahead of the crucial holiday shopping season. But the new products all use Apple's latest in-house chip, the M5. Rumer's consumer tech editor, Mark Gurman, joins us for more. How impactful is it that they're going yet more and more on their own supply chain, their own hardware? Well, using in-house chips, of course, is paramount to what Apple has been doing under Tim Cook for the last decade and a half or so. But in terms of these new products today, this is probably the most minor set of Apple product refreshes that I could remember in recent history.

11:04What they've done here is essentially taking designs from prior years, the iPad Pro design from last year, the MacBook Pro design they've been using since 2021. Obviously, the Vision Pro rolled out at the beginning of 2024, and they put new processors inside. So for the Vision Pro, going from the M2 to the M5, that is a sizable leap. The UI should be a bit smoother. The device is now more comfortable, but still$3 ,500. So the fundamentals of the product have not changed to any major extent. The MacBook Pro, what they've done here is they've split the line in terms of rollout timing between the entry level and the high end.

11:43So the high-end machines with higher-end versions of the M5 chip, that won't come out until early next year. And then, of course, the iPad Pro, that got a gigantic upgrade with the M4 version last year. So this is about just bringing it up to the latest processor. In terms of upgrades, very unlikely that anyone should or will upgrade if they have the last-generation versions of those products. But ahead of the holiday season, they keep everything humming. So if we want something really new, we have to think about the new home devices eventually coming on tap. There's a great story on the terminal about where these are coming from.

12:16It seems as though they're leaning less on China all at the same time as Tim Cook's trying to say he's going to invest more in the country. Yeah, both can be true. They're going to up their investment in China. But at the same time, for some newer products, they're going to differentiate. They're going to diversify. They're working with BYD, obviously known as an electric car maker, predominantly in Asia. They also do mass manufacturing. They've been doing some final assembly for Apple for some iPads over the last year or so. They're going to do these new home devices. Why is that interesting?

12:52Typically, when Apple rolls out an entirely new product category, they start with China. This time around, they're starting with Vietnam, where they already, like I said, make some iPads. They make the vast majority of Apple Watches and AirPods for the U.S. market, and they also make some HomePods. Bloomberg's Mark Gurman, always with the latest. We so appreciate it. Meanwhile, in China, a fatality involving Xiaomi's Su7 EV sedan. Well, it's renewed scrutiny on flush door handle designs. Bystanders were unable to open the doors for the vehicle to rescue a suspected drunk driver during a collision who died when the vehicle burst into flames.

13:28Now, flush door handles, they've recently come under scrutiny globally. Tesla now facing an investigation after Bloomberg reported incidents related to the door design. and Rivian also saying they'll be redesigning their handles in an upcoming future model. For more, Bloomberg's Craig Trudell joins us. And your team have been so on top of what has become a global concern about the design of door handles in latest EVs. And the big concern here, I feel like in these issues of crashes and battery fires is particularly the troubles that people are having with getting into these vehicles from the outside.

14:02Yes, there are issues with, you know, mechanical releases that are different from inside the vehicle and different from the typical way you get out of the vehicle. But what's really, I think, alarming for people and particularly for first responders is if these door handles are built from the outside to where they just aren't operable when the low voltage battery fails or sort of purposely goes out of commission to sort of prevent against these battery fires. You're just not able to get into the vehicle without bashing through a window or some other means. And so to have built a vehicle where the external door handles are inoperable without low voltage battery, that's just a problem and sort of on its face a concern for regulators.

14:51Well, while we might see a rush of buying mini hammers and cutters to go inside vehicles at the moment, Craig, which is the latest purchase I just made, it might be focused on the regulatory pushback. And you're seeing China in particular looking for feedback, open comment by November 22nd. But what else are we expecting Chinese regulators to do here? Yeah, I think it's interesting that, you know, this has been spurred. This rulemaking and this soliciting of views from the industry got underway because there was a similar incident back in March also involving a Xiaomi vehicle. And so we've seen the regulator in China move pretty quickly here in terms of, you know, there was an incident that got a lot of attention.

15:33There's the second incident. And I think, interestingly, we may see some manufacturers not necessarily wait for the regulator to change the rules. I think Linda Liu's story about this latest incident out today goes into this idea that, you know, some manufacturers already are changing their door handle designs to take into account that this is a concern. And I think one of the things that we've seen in China's car market is just the level of competition is so intense that any way you can sort of sell your car as being incrementally better from different performance aspects, including safety, you're going to jump at that opportunity.

16:12Zika jumping out at the 9x Sports utility vehicle already, going back to an old school kind of handle and a return to common sense is what one consultancy called it. Bloomberg's Craig Trudell, thanks so much. Now coming up, we're gonna be talking all things quantum. The CEO of D-Wave joins us. This is Bloomberg Tech.

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17:54News out of Europe from D-Wave, which develops quantum computing systems. Today, the company announced an agreement with the Swiss quantum technology to deploy a D-Wave Advantage 2 quantum computer in Europe. It's expanding access to the technology globally. D-Wave CEO Alan Baratz joins us now from Lake Como, which is very close to Switzerland, in Italy, where the announcement comes from. Alan, what does it mean to be deploying this right here, right now? So we are going to be deploying an Advantage 2 quantum computer here in the region. and it will be available to researchers, scientists, businesses in Italy to basically explore how to make the best use of quantum computers.

18:39This is a part of the Q Alliance, which was announced yesterday. D-Wave is a founding member of the Q Alliance, and that's all about bringing quantum to Italy in support of their digital transformation initiative. Let's talk about the 4 ,400 plus qubit advantage to system. What can it do that is more sophisticated than classical computers today, Alan? So our 4 ,400 qubit advantage to quantum computer is arguably the largest and most powerful quantum computer in the world. At over 4 ,000 qubits, we have almost 10 times more qubits than anybody else. And with respect to the power of the processor, we recently published in Science a paper showing that we are able to compute properties of materials on our quantum computer in minutes, that it would take nearly a million years to compute on the fastest supercomputers in the world.

19:41So this is literally computing properties that can't be computed classically. This is what everybody in the quantum industry has aspired to, namely the ability to do something important and useful on a quantum computer that can't be done classically. And this advantage to quantum computer has achieved that goal. I believe you solved a physics problem on the behavior of magnetism, particularly in certain solids. What's interesting is the turn of phrase arguably, Alan. Why is it only arguably the most powerful at the moment? How is your technology differing or still trying to measure itself out versus others out there?

20:19Yeah. So when it comes to the ability to perform a computation on a useful problem that can't be solved classically, we have the only quantum computer in the world that is capable of doing that today. I use the word arguably in the context of largest when I talked about 4 ,400 qubits. And the reason why I did that is because D-Wave quantum computers today are what's called annealing quantum computers. Everybody else in the industry is pursuing a different approach called gate model quantum computers. And while they have many fewer qubits, the nature of the qubit is a little different between annealing and gate model.

21:04So we believe that at 4 ,400 annealing qubits, we are significantly larger than anybody else because all these other gate model systems have tens to a few hundred qubits. But there is an academic debate around the difference between the qubits. What's interesting is you are making and generating real revenue. It's small, but it's there. but the market capitalization of yours and many other quantum computing companies has just gone so far up and to the right, Alan. Is the promise and hope being shown up in reality from orders, because this is Europe taking a 10 million euro step forward, what about other deals?

21:45Yeah, so we announced at the end of last year that we had sold a quantum computer to the ULIC supercomputing center in Germany. They purchased that system to connect it to their Jupiter exascale supercomputer to explore new AI workflows. And then earlier this year, we announced that we had signed a memorandum of understanding with Yonsei University and Incheon City in South Korea for the acquisition of a quantum computer there. And we have, frankly, a number of other countries and research centers that are interested in acquiring our quantum computers as well. And that's just with respect to purchasing of the quantum computers.

22:34Our quantum computers today are also used commercially in support of a broad array of business applications. For example, North Wales Police is using us to compute the best way to forward place police vehicles to be able to arrive at incidents in a timely fashion. These customers use us over the cloud. So we have both a cloud-based business and an on-premise business. North Wales, UK or Australia? UK. Fascinating. Absolutely fascinating. Thank you very much indeed, Alan Baratz. It's learning about the European focus that you seem to be having with the business in particular, US-based company, and the new announcement out of Lake Como.

23:19We wish you well over there, D-Way CEO.

23:26Welcome back to Blue Bay Tech. Let's check in on these markets because we are trading higher. Once again, new AI deals, AI compute deals helping push up the Nasdaq 100. We're at 1.2 % amid some of the geopolitical risks. We continue trading higher. Let's go under the hood and look what's really moving from a points perspective. We know about the ASML numbers. We know about the optimism that chip equipment is still selling strong. Well, let's have a look at AMD and indeed NVIDIA, both of them getting some more mighty price target raises over at HSBC today. We're up more than 8%. In fact, AMD is your leader in terms of points moves on the NASDAQ 100.

24:01Again, this hope that yet more AI compute needs means more desire for their chips, and they are making an indent on the likes of NVIDIA. But NVIDIA could go higher to the tune of, what, an$8 trillion dollar company. So HSBC is currently outlining. We're at 181 as we speak, up nine tenths percent on the day. Let's dig into that particular report a little bit more and just the AI further more broadly with Bloomberg's equity reporter Ryan Vlastelica. And Ryan, they are seeing significant market cap accretion to NVIDIA on what over at HSBC? Well, it's not going to come as a surprise to many people, but they are touting the growth potential of artificial intelligence.

24:39Specifically, they see the total addressable market of these AI chips expanding beyond the hyperscalers, which are the major NVIDIA customers right now, Microsoft, Amazon, Alphabet, Meta, and so forth, and really sees that expanding beyond them into other parts of the economy. So as this continues to grow, they see NVIDIA's earnings continue to grow and eventually leading it to the market cap you said before, I think was about nearly$8 trillion. So certainly a significant jump from where it is right now. They're the most bullish when it comes to the overall analyst recommendations, Ryan. How much are you seeing portfolio managers echoing that sort of, well, fervor and excitement?

25:19Because we've had a lot of talk of bubbles. Just yesterday, we're discussing them all. Yes, I do hear some people talking about having a certain amount of skepticism. Can this continue to go on the way it has been going on? But even when I ask them specifically, do you see maybe new competition threats from AMD or Broadcom, just given some of the deals that those companies have announced this past week, they still continue to like NVIDIA. They still see it as the market leader. It continues to have a dominant market share in the market for these GPUs. So no one is very bearish. I think there is one analyst on Wall Street right now who has a sell equivalent rating on NVIDIA.

25:54But other than that, people are pretty positive about it. I'd also note that as it continues to grow, the multiple has been coming in a little bit. So these are not the kind of dot-com era multiples that some of the bubble concerns might be indicating. These are certainly a little bit above their medium-term average, but certainly not at the levels that would be a real nosebleed. Bloomberg's round plus Celica. Thank you so much for the breakdown. Let's talk more about the AI compute demand right now because it's time for Talking Tech and Microsoft data center builder developer Nscale. Well, they've just reached a fourth deal, this time to Builder site in Texas with power capacity as much as 240 megawatts.