Record-setting results from Intel, bolstered by robust sales of chips used in notebooks, in conjunction with strong orders and revenue growth at chipmaker ASML have focused investor attention on the tech recovery and fuelled industry players' share prices this week. Here, Morningstar equity analyst Andy Ng reviews both the US bellwether's and the Dutch semiconductor manufacturer's recent results.
Intel Achieves a Record-Setting 1Q
Intel reported first-quarter results that were within our range of expectations. The firm set a record for first-quarter sales, as continued strength in the PC market helped drive demand for microprocessors. Intel reported revenue of $10.3 billion, down 3% sequentially due to seasonality, but up 44% when compared with the year-ago period. The major theme, which carried over from the fourth quarter, was the robust sales of chips used in notebooks. On the profit front, Intel posted an operating income of $3.4 billion. The firm had another quarter of spectacular gross margins, which came in at 63%. This number was slightly lower than the 65% gross margin reached in the fourth quarter, due to lower volume and some higher costs, which were offset by higher processor prices, but it was impressive nonetheless.
For the second quarter, which tends to be the seasonally slowest of the year, management expects revenue to be between $9.8 billion and $10.6 billion. If this forecast proves to be accurate, it would mark another solid quarter for Intel. The recent upturn in the PC market has more room to run, as the long-awaited upgrade cycle of corporate PCs appears to be finally arriving. We expect this, combined with strength in demand for Intel's new server processors and continued tailwinds from the notebook segment, to help further propel the firm's financial results in the coming quarters.
ASML Reports a Solid Upturn in 1Q
ASM Lithography benefited from a continued recovery in demand for lithography tools from chipmakers during the first quarter. We are raising our fair value estimate for the Amsterdam-listed shares to EUR 16 from EUR 12.
For the quarter, revenue was EUR 742 million, a sequential increase of 28% and a big jump from the EUR 184 million reported a year ago. ASML also saw a strengthening in orders, which came in at EUR 1 billion, compared with EUR 956 million in the fourth quarter. Similar to last quarter, the firm benefited from continued improvement in demand from memory chipmakers and foundries. The recovery that's being experienced by ASML appears to now be running full steam, as management believes that the firm is on track for 2010 revenue to exceed its previous peak of EUR 3.8 billion, reached in 2007. Continued increases in capital spending by computer memory makers and foundries, combined with an expected resurgence in demand for lithography tools from flash memory manufacturers, should help propel ASML in the second half of the year. Better business conditions allowed the firm to achieve an operating profit of EUR 137 million, versus EUR 68 million in the fourth quarter.
Given the solid upturn, we are increasing our revenue and profitability assumptions in our valuation model. We believe ASML is also benefiting from a widening technology lead in lithography over rivals Nikon and Canon. As the business environment rebounds from the trough seen last year, we expect ASML's revenue to increase 140% in 2010. From 2011 through 2014, we believe revenue will increase in the mid-single-digit range on average. We think the firm will achieve an operating margin of 23% this year. Over the longer term, we expect operating margins will trend toward the upper teens.
