ASML’s Earnings & How to Follow Earnings Season

0:05Travis Hoium:Earnings season has started hot for the market, but will that continue? Motley Fool Money starts now.

0:20Travis Hoium:Welcome to Motley Fool Money. I'm Travis Hoium, joined by Lou Whiteman and Rachel Warren. We want to dive into one of the interesting earnings reports to start thing today. And then let's put some context to why the market's moving higher a little bit later and what the Fed said. But Lou, ASML reported earnings this morning as we're recording. The results were fine. The market was impressed. Shares are up a little bit early in trading. But they also said that sales in China are expected to be down significantly going forward. saying that sales in 2026 are going to be higher than 2025 doesn't seem like the kind of company that should be trading for 10 times sales and 35 times earnings.

1:02Travis Hoium:But what's going on behind the scenes here? How should we look at an earnings report like ASMLs?

1:08Lou Whiteman:So first things first, ASML, for those who don't know, they make the machines that make the chips. And these are highly specialized machines. I've seen some estimates that it would take a decade in billions of dollars for any competitor to catch ASML, even if ASML stood still. That is their advantage. The high-end AI chips have to come off of ASML machines. The problem with this, Travis, is these machines can run almost half a billion dollars a piece. They get transported in two Airbus, two Boeing 747s when they get delivered. These are massive things. This is a business where one order of one unit of your products can make or break a whole quarter.

1:53Lou Whiteman:It's not a momentum business. It's not one where you can really just read through and say, they have to be gangbusters if AI is gangbusters. Because honestly, the foundation that was laid years ago, as their last generation was rolled off and was sold to these manufacturers, That's today's AI boom. And tomorrow down the line is future generations. It's just not a stock you can look at quarter to quarter as a momentum investor.

2:23Travis Hoium:Rachel, what are you seeing from this one? Is the momentum, at least long term, still kind of intact with this as an AI boom play? I definitely think so. Look, they're the sole manufacturer of that advanced EUV lithography equipment. So their results do offer, I think, pretty critical insights into the health and direction of the AI sector. And we are seeing a time where the AI arms race is accelerating among tech giants. Companies are really rapidly building out their advanced computing capacity. And that requires the most sophisticated semiconductors that only that EUV technology can create.

2:56I think another thing that we can take away from their results, I mean, I think we could look at this space and say the current investment cycle for AI infrastructure, it's a sustained trend, right? It's not a short-term phenomenon. I mean, you could think of one example. They're really expected to benefit from this recently announced NVIDIA and Intel deal, as that could lead to increased orders for their advanced semiconductor equipment. And ASML's CEO, he noted that AI-driven investments are extending as well to a much broader range of customers, including those in Advanced Logic, Advanced DRAM.

3:27And that really shows that the AI rush is maturing beyond just a few hyperscalers. And I think it's becoming much more widespread throughout the chipmaking industry. And finally, one other thing of note that kind of stuck out to me was they announced a new partnership with the French AI firm, Mistral AI, to embed AI into their own production processes. And that could really position them to benefit from the AI.

3:50Travis Hoium:So, the AI equipment is going to be made by AI? Yes. Essentially.

3:56Lou Whiteman:Can I say I'm skeptical about that? I mean, this is a company that has used technology. I mean, you're literally just etching on millimeters of sand. They have been using technology forever. I do believe that AI can improve it, but I just don't think we're going to see... Yeah, it's supposed to improve their production time and processes. Right. But this is a highly, highly complex machine. I don't think any of these open AI orders or anything does anything for ASML. And I don't think it has to. All of those chips will be built on machines that have been around forever. The next big thing for them is all of the geopolitical, all of the insourcing, all of these big fabs that are going to be built in Arizona or wherever, and more and more countries looking to domesticate versus having everything in Taiwan.

4:43Lou Whiteman:Those are the next generation of orders. Look, this is a company that still expects to do between 44 and 60 billion euros in sales by 2030 from 32 billion today. At a gross margin, hopefully at 60%. This, for me, has been the ultimate buy and hold in my portfolio. It never looks cheap, but it is the only game in town in an important part of the market. And it just continues to chug along.

5:12Travis Hoium:Lou, do you think this is the kind of company that can just be a stalwart in a portfolio? Because you mentioned some of the growth numbers. I mean, even at a best-case scenario, based on their own guidance, you're going to be growing in double digits, but it's not going to be the kind of explosive growth numbers that we get out of some, even some of the hyperscalers. So is it just, you know what, if you get a dip, if you get a good price, this is a nice one to have in the portfolio, but the expectations for returns should maybe be a little bit lower than they were 10 years ago when this was up and coming technology.

5:43Lou Whiteman:It's yeah, it's a mature business. I mean, I will say this, it's really hard to day trade a company that's core product. They may sell a dozen of them, a quarter, right? Because again, the difference between nine sales and 10 sales can be a dramatically different looking P &L sheet for the quarter. You have to look long-term at this business. And yeah, for me, this is just, I believe, I mean, chips are cyclical, but I believe in the long-term prospects for us needing more chips. I believe in their headstart to, you know, be the company to make some machines for that. It's just a question of the pace and demand, and that'll vary from quarter to quarter.

6:23Lou Whiteman:But yeah, I've owned it forever, and I've added a couple times when the market is freaked out over short-term things, and that's worked out pretty well for me.

6:33Travis Hoium:Coming up, we're going to talk about how the Fed is moving markets. You're listening to Motley Fool Money.

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7:36Travis Hoium:Welcome back to Motley Fool Money. This week, Jerome Powell gave some bullish news, at least in the market's eyes, indicating that interest rates are likely to go lower later this year, at least the short-term interest rates that the Fed controls. Lou, what did we hear, and how should we actually think about this? Because the market seems to read into absolutely everything he says.

7:56Lou Whiteman:Yeah, as we do, and probably to our own detriment, because I think we overanalyze all of his words. But what he said was, is he remains worried about unemployment. And with good reason. I mean, we're getting a lot of headlines. That would imply, though, that if the Fed is worried about unemployment, part of the dual mandate and the solution, unemployment has always been lower rates. So, I do think the market is saying, yes, we're likely to get another rate cut from here and maybe multiple rate cuts. Whether or not it's a good thing and whether or not the market should be rejoicing it, time will tell, right?

8:30Lou Whiteman:I mean, there's an expression, Travis, that we're always fighting the last war, right? That we're always focused on how things went last time. The last time the Fed cut rates during COVID, it was a great time for Wall Street. Markets shot back up really quick and everybody got rich. I think that was more of a COVID phenomena and the vaccine coming in than it was the result of lower rates, but we're tied to that. I worry that this time is going to be a lot more similar to the 2008 or the dot-com crash, which took years, if not decades, to recover from. It's be careful what we wish for. But right now, the market is very excited about low rates, higher prices.

9:11Travis Hoium:Rachel, we do have this dynamic here. If you go back to COVID, they did lower rates, but then we also had inflation. And that inflation led to higher rates. So how should we be thinking about this? Because it does seem like the Fed is stuck kind of between a rock and a hard place. They really are. And this is something I've talked about before. But, you know, the antidote to high inflation and the antidote to low or high unemployment are two very different solutions that the Fed usually has to deploy. So, I mean, the fact that the Fed is thinking about cutting rates further, that can be a signal of economic weakness, right?

9:45You know, in this instance, Powell noted that, quote, rising downside risks to employment. He also noted the challenging situation at hand. I think there's this idea, though, that they are recognizing economic weakness. It also suggests that the Fed is maybe reacting to rather than getting ahead of a potential downturn. And the thing that I think that's important to understand here is rate cuts, they are intended to stimulate spending and investment. But they can't fix deeper structural problems. And if the economic weakness was to be severe enough, rate cuts alone may not prevent a recessionary environment.

10:17But I do think we're still a long way off from that worst-case scenario. But if you have a rate cut because we're seeing signals of economic weakness, it is certainly a mixed bag. I think the immediate market enthusiasm we're seeing stems from, obviously, you've got a boost to asset valuations and corporate borrowing that can ensue. But the real benefit of the cut depends on whether it successfully stabilizes the economy and improves long-term growth prospects without creating new risks. And that's still something that I think remains an uncertain factor and remains to be seen.

10:48Lou Whiteman:You know, in my lifetime, we've gone from kind of ridiculing the Fed to almost a cult of the Fed, the masters of the universe. And I feel like that pendulum is going to swing back in the year to come. There's only limited tools that they have. They don't have a magic bullet. They don't have all these deep state powers to control the economy. I think we could find that out the hard way. What it looks like right now is that this world where we have stagnant growth, higher inflation, and weak employment are all there together. We have a word for that. It's stagflation. There is no magic bullet for that.

11:25Lou Whiteman:The Fed could look pretty powerless if that comes to be. I hope it doesn't come to be. But I do think investors are looking back to COVID and looking back to almost like the myth that created around Alan Greenspan. And it's like, the Fed will solve this. And I don't know if the Fed has it in its powers to solve it this time.

11:44Travis Hoium:Speaking of the things that are out of the Fed's control, one of the things that was reported this week is that Amazon is looking to cut their HR workforce by about 15%. Now, this is one of the companies that has been steadily growing their workforce. It is either close, if not the biggest employer in the US, has hundreds of thousands of employees all over the world. But they're saying that artificial intelligence is going to make them more efficient, more effective. So, Rachel, is this one of those things where... And look, we're seeing this in the unemployment data for younger workers. It's harder to get a job coming out of college or out of high school than it has been in a long time because those entry-level jobs are partially, at least, being replaced by AI.

12:28Travis Hoium:So, is this one of those things where the Fed can't control what's going on in artificial intelligence? They have those blunt instruments, but maybe that doesn't impact employment the way that it did 10, 20, 30 years ago. I do think in a rapidly changing labor economy, some of those tools are less effective than we've seen in times past. And I think that's very much the case in the AI revolution, right? I mean, you know, the Fed's tools are blunt instruments, right? They're designed to influence the overall economy, but they're not, you know, to solve structural labor issues like technological unemployment.

13:00For example, you know, the Fed can't raise or lower interest rates to bring back a specific type of job. And it's interesting. I mean, there was actually a study by the Federal Reserve Bank of St. Louis that had found a pretty striking correlation between high AI exposure in an occupation and rising unemployment rates, particularly in tech-heavy sectors. So, this is a real phenomenon. And we've had comments, right, from Fed Chair Powell and others noting that that exact impact of AI is uncertain and they're kind of in a wait-and-see mode. But I don't think there's a clear course of action they have against the specific challenge of AI.

13:31And I do think that might affect how we view the Fed's role within the broader employment space in the coming decade and beyond.

13:39Lou Whiteman:The whole AI thing, I don't think the Fed can get out ahead of it. I think we need to monitor it. It's really hard to say long-term whether or not this is a net job creator or a net job destroyer. I think we don't know where the future goes. For now, Amazon getting rid of back office, which streamlined process. That seems to be where AI is going right now, just making processes simpler. I think it's worth noting, but I don't, I mean, of all the things that the Fed needs to worry about right now, I don't think the Amazon announcement and even AI should be front of mind. There's just so much in the now right now.

14:17Travis Hoium:Definitely a lot for them to think about, something we'll be talking about, obviously, for the rest of the year. Next up, we are going to give our tips for reading earnings reports this season. You're listening to Motley Fool Money. Right now, get up to 15 % off select storage solutions. Put heavy-duty HDX totes to good use, protecting what's important to you. The solid, impact-resistant design prevents cracking, and the clear base and sides make items easy to find even when the totes are stacked. Find select shelving and tote storage up to 15 % off at the Home Depot to organize every room in your home, from your garage to your attic.

14:52Travis Hoium:Visit homedepot.com, how doers get more done. Welcome back to Motley Fool Money. It is earnings season. Started really this week. Tuesday, we started to get many more earnings reports, but things really kick up over the next couple of weeks. So I wanted to get an idea. How do you read an earnings report? What's your process when the announcement comes out? Rachel, let's start with you. I think the important thing to bear in mind when you're going into earnings season, understand that earnings are about expectations when you're looking at how the stock is responding post-earnings. The market's reaction is driven by how a company's results and also how its forward guidance compare to Wall Street's expectations.

15:31A company can post fantastic growth, but still see its stock fall if investors think that future outlook is less optimistic than previously thought. Sometimes we see the opposite. A stock rises on mediocre results, even if the whisper numbers, so to speak, were worse. I think that's something to really understand when you're differentiating the financial performance of a company from how the stock reacts post-earnings. But also understand the quality of the earnings matters more than the headline. I think it's really important after any report for a stock you own, a stock you follow, stay disciplined, wait for the dust to settle, and then really use that information to evaluate how and if your long-term investment thesis is still intact.

16:11These earnings reports are really valuable for us as retail investors, but it's also really important to look at them within the broader spectrum of our investment journey.

16:21Lou Whiteman:Look, the numbers are backwards looking. The commentary is forward looking. There's value in the numbers, but if you're doing it what I think is the right way, long-term, they're milestones. They're not really supposed to change what I think. It's more of a chance, has anything gone wrong? For me, the commentary, the vision for the future, or what people are seeing is more interesting, especially right now. I'll admit, I'm really confused by the current environment. I don't know what to think. And so I really now more than ever just to hear what CEOs are predicting about the holiday season, about what's to come.

16:56Lou Whiteman:That to me is where the value is in earnings season in general. And especially this time around, I don't know what to think. So I would love to hear what other smart people are thinking right now. Yeah.

17:07Travis Hoium:I'll just add a couple of things here. I almost, I try to never look at what the market's reaction is to an earnings report because I want to build my own reaction based on my thesis in that company. So, you know, do I think that revenue growth was solid or that margin expansion was what I was looking for? I do try to, like you said, Lou, listen to every single conference call for the companies that I own. And one of the things that I always take away from those is you can hear the true leaders and the true visionaries in those conference calls. They will tell you what they're going to do for the next 5, 10, 20 years.

17:42Travis Hoium:The people who are answering with buzzwords and trying to obfuscate what they're saying, those are not the 10X, 100X opportunities that we're all looking for in the market. A lot of information can be gleaned from spending a little bit of time listening to leaders of the companies that we own. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows The Motley Fool's editorial standards and is not approved by advertisers.

18:19Travis Hoium:Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Rachel Warren, Dan Boyd behind the glass, and the entire Motley Fool team, I'm Travis William. Thanks for listening to Motley Fool Money. We'll see you here tomorrow.