Disconnect Between AI Deals and Spend: Citi's Gardiner

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00:00You have a buy rating on ASML. You have a price target of more than €1,000.

00:04What takes us there, Andrew?

00:07Good morning. Thank you for having me. Yes, we continue to be bullish on ASML.

00:12I would say this morning's results and the orders in particular that you were highlighting with

00:16Henry just now are a step in the right direction in terms of the potential appreciation of this

00:22stock. I really think we've been on a journey over the last year in terms of resetting a base

00:29for 2026. And they have confirmed this morning that, you know, expectations are at a reasonable

00:36level. They don't want to yet go so far as to call out growth, but at least we're not going to

00:41decline next year. And I think that's removed one of the key uncertainties for the stock.

00:46And that's helped to get us to where we are today, just shy of €900. In terms of further

00:52appreciation from here, it's all about the growth beyond 2026, in my view. And that, you know,

00:58really comes down to some of what you've been alluding to with the demand coming from the

01:03artificial intelligence players into the data center. Here, you know, clearly there's a lot

01:09of momentum in terms of the news flow. ASML management were highlighting that just recently

01:16on the conference call. It's not yet fully reflected in their order flow, but it's something

01:20that we expect to come in the future quarters. And so it's really that momentum that will drive

01:26the stock higher. I love that you say that, Andrew, because I pulled this part from your

01:29note, which I think was really important for our viewers, because in particular, you say

01:32SML acknowledged basically the momentum in the chip industry and market more broadly, but

01:38this is not yet reflected in firm orders. And there's a growing disconnect in the industry

01:42between the myriad of AI chip deals being announced and the amount of spend committed to these

01:47equipment companies. When will it show up? Are you really confident that it will show up?

01:53Because many are questioning the absolute financing of some of these orders.

01:59Yeah, I think it's an absolute, it's a critical question for this space. As has been talked

02:05about already this morning on this program, you're seeing all of these deals being announced

02:10by the likes of NVIDIA, OpenAI, you know, committing to certain volumes at AMD and NVIDIA, the memory

02:18companies. And yet, you know, ASML, sure, was a healthy order intake of 5 billion euros, but

02:24nothing too out of the ordinary for them. You know, certainly they've had stronger quarters in terms of

02:30order intake. So I do think given the lead times in particular, we are going to see, need to see orders

02:36pick up in the coming quarters in order to support the future demand that's being talked about by the

02:41artificial intelligence sector in particular. For example, ASML on the EUV tools that you've

02:47already highlighted, their lead times are roughly 12 months. So even if you're ordering today in the

02:52fourth quarter, you're not going to get those tools until the fourth quarter of next year, ramping

02:57production into 2027. So the lead times are quite long. And therefore, the supply chain needs to be

03:03prepared for, you know, for that ramp to come.

03:06Andrew, you don't cover the stocks in particular, but if you are thinking about an announcement coming

03:11from NVIDIA saying we're going to be there with thousands of chips ready by 2026 to be put into

03:17whichever data center that OpenAI has just asked for, and the AMD as well, do you think the backlog is

03:22there that they've got them, the inventory, to be able to sustain the 2026 dates that we keep getting

03:28from these companies?

03:29So in terms of thinking through the supply chain, you take ASML as a critical supplier,

03:37the only one in the world who can supply the EUV tools that are necessary for many of these chips.

03:43They are close to, but not quite fully booked for 2026 deliveries. That will be the case by the end of

03:512025, given that 12-month lead time. And so really, you know, the capacity that is already planned to be

03:57installed next year. Sure, there could be a little bit of upside, but, you know, we're already getting

04:02close to the limits. And really, as I described earlier, what you're playing for is the growth

04:07into 2027. ASML management this afternoon here in Europe commented on the fact that, you know,

04:14they don't have perfect visibility because those orders aren't there yet, but they are trying,

04:18they're acknowledging the growth in the industry, the demand that is coming, and they're trying to

04:23prepare themselves and indeed their suppliers to be able to make sure that they are not going to be

04:28a bottleneck into future years. What was so notable about this quarter just gone that they reported

04:33on for ASML was the 42% exposure still to China in terms of revenue. How much smaller will that

04:39become eventually? Yeah, so they have called that out in terms of the expectation for 2026 and saying

04:46it's going to decline significantly, unquote, into next year. I would say on a year-to-date basis

04:53through September, they're at about 32% of system sales into China. As you point out, that was higher

05:01in the third quarter at about 42%. So they're still generating very strong business in China at the

05:07moment. They're just saying given the extended level of spend this year, last year, indeed the year

05:13before, that they think it should normalize into the future. At the moment, though, with the

05:19restrictions in the way that they are, the Chinese companies are ordering what they can. And so, yeah,

05:25we'll just have to see exactly how that pans out into 2026. The lead times for the type of tools that

05:31the Chinese customers are buying are not 12 months in the way that they are for EUV. They're much shorter,

05:36six months, perhaps even less in some cases. So again, things could change as we look into 2026.

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