Tech Newsround – Memory and ASML Q1 26

Memory: the cycle is here to stay

• While life has never been better for the memory makers, there is no doubt in my mind that this is a cycle, meaning that at some point, there is going to be a monumental hangover from the party of the century.
• The airwaves are full of stories of weakness in the smartphone market, and now Microsoft has substantially raised prices for its in-house products, reflecting both the memory supply situation and its obvious change of heart when it comes to market share in PCs.
• Microsoft’s cheapest Surface product (Surface Pro 12”) was $799 in 2024, and now the same version with the same memory and storage is priced at $1,049, a 31% YoY increase.
• This has happened right the way across the range with the Surface Laptop 13.8” and Surface Pro 13” up 25% YoY and the Surface Laptop 13” version up 33% YoY.
• If this is entirely due to memory pricing, then it spells very bad news for the smartphone market as it means that prices will need to rise substantially and there is much more weakness to come, but I am not convinced that it is.
• The size of the price rises is substantial, and I suspect that there is also an element of Microsoft deciding to back off on its policy to aggressively price its products to gain market share.
• The problem for Microsoft is that its products are now substantially more expensive than some of Apple’s products, which could easily give the Mac a boost.
• The net result is that device markets are going to suffer in 2026, and there are already forecasts floating around that predict a 4% decline in the smartphone market as a result of rising prices caused by the memory shortage.
• However, as always, the cure for high prices is high prices, and the current level of profitability will cause the memory makers to build more capacity, and at some point, they will build too much, and there will be a cyclical downturn.
• This will be very painful given how much these companies are increasing their revenues and earnings at the moment, but the good news is that it is not happening yet.
• Hence, I remain very bullish on memory for 2026 as all the major players are destroying estimates at every turn and still trade at under 10x 12-month forward PER.
• I continue to hold Samsung in my portfolio but would not be adverse to either Micron or SK Hynix at this juncture.

ASML Q1 26: Jam tomorrow

• ASML reported reasonable results and raised guidance for the full year, but the immediate term will be uncertain as China remains a significant portion of sales despite precipitous falls.
• Q1 26 revenues / EPS were €8.77bn / €7.15 nicely ahead of estimates of €8.63bn / €6.60 but Q2 26 guidance missed.
• Q2 26 revenues are expected to be €8.4bn – €9.0bn (€8.7bn) which is below the consensus estimate of €9.08bn.
• I suspect that a large part of this is due to China, which fell from 36% of revenues in Q4 25 to 19% in Q1 26, and I expect more to come.
• ASML still makes a lot of equipment that China is currently allowed to buy, but it will be the older equipment that is much cheaper and therefore its contribution to sales is likely to continue declining.
• However, ASML went on to say that AI-related infrastructure spending is leading to capacity expansions being accelerated as much as possible, meaning that for the full year 2026 it expects to sell more than expected.
• Here. FY 2026 revenues are expected to be €36.0bn – €40.0bn (€38.0bn), which is nicely ahead of consensus of €37.7bn.
• ASML is basically saying that once China reaches its new level of revenue in Q2 26, H2 2026 will feel the full impact of the acceleration of AI investments.
• ASML does remain hostage to the US Department of Commerce, but looks set to be a beneficiary given its monopoly on advanced chipmaking equipment.
• Furthermore, if Elon Musk’s Terrafab goes ahead, ASML will have more demand than it can handle for some considerable amount of time.
• However, the shares are expensive at 43.0x 2026 PER, and TSMC, which is exposed to almost all of the same trends, can be had for 23x 2026 PER.
• Hence, I would choose the memory makers over TSMC and TSMC over ASML and remain uninterested in a position in ASML.