ASML, Europe’s most valuable technology company, has been one of the best-performing stocks in the SX5E, +30% year to date and +70% since the beginning of 2023, on the back of stellar demand for its most sophisticated machines, which use deep-ultraviolet lithography required in the production of most sophisticated semiconductors. While no one can disagree on the potential of the AI industry, we believe the euphoria around the broader Tech sector has reached excessive levels, reflected in the surge of both market valuations and call option positioning on the largest Tech names. (see our recent note Equity Derivatives Weekly – A not-so-big short)
Looking at other Tech stocks such as Texas Instruments, its benign Q4 results gave a disappointing quarterly forecast, indicating that sales of chips for industrial and automotive uses haven’t rebounded. NVIDIA is another tech stock reporting on 21 February, where we believe the markets’ excessive optimism on earnings could reinforce a reversal in the global Tech sector should the expectations prove to have been over-optimistic leading up to the parabolic rise in its share price.
ASML orders more than tripled in Q4 23 from the previous three months, with order backlog rising to a record EUR9.2bn from EUR2.6bn in Q3 23, reversing a trend of four quarterly declines, while sales rose 30% YoY to EUR27.6bn in 2023. China accounted for c.38% of ASML’s sales in Q4 and became the company’s largest market in 2023, from only 8% in Q1 23. Behind the rise in orders has been China’s effort to front run US sanctions on orders, appearing to have ordered several years’ worth of demand ahead of the crackdown on Chinese imports.
In terms of volatility, 1M 90%-110% skew on ASML is at a 2YPc0, reinforcing our view of buying puts on the stock as it is currently trading at an RSI above 70 for the last two weeks. With valuations at 44x PE looking full, skew at a two-year low and expectations of a broader Tech sector pullback, we suggest buying Mar 24 750 puts at a net cost of 0.59% of underlying (spot ref: 846). Should the spot price decrease by only 5% to 800, the value of the strategy would return c.3x on the premium employed, all other parameters remaining equal.