Should one consider purchasing ASML shares?
ASML (-0.44%) is renowned for its dominance in the semiconductor sector, being the sole manufacturer of extreme ultraviolet (EUV) lithography machines, essential for the chipmaking process.
Yet, this competitive edge hasn't translated into significant gains for the stock this year. While competitors like Taiwan Semiconductor Manufacturing have thrived, ASML has been left in the dust during the AI boom. As of Dec. 16, the stock has plummeted 5%, lagging behind the S&P 500 and the broader chip sector.
The graph below illustrates the disparity.
However, a downturn can sometimes present a buying opportunity. So, is ASML a worthwhile investment today? Let's dive in.
ASML's Current Position
The dip in ASML's stock price is understandable given the company's Q3 earnings report, which saw it revise its 2025 projections due to a deceleration in Chinese demand following an earlier surge fueled by an order backlog. ASML anticipates that China's revenue will account for around 20% of its total revenue in 2025, down from approximately 50% in 2024.
ASML's business is cyclical, as it manufactures high-priced equipment and sells only about 100 units per quarter. Consequently, market fluctuations or delays can significantly impact its results.
In addition to the Chinese slowdown, ASML is also grappling with U.S. export restrictions prohibiting the transfer of advanced technology to China. The company's booking results were disappointing, with only 2.6 billion euros worth of new orders secured. This could be a red flag regarding future demand.
Despite these challenges, ASML has demonstrated year-over-year revenue growth, with Q3 revenue climbing to 7.47 billion euros, a 12% increase. Earnings per share also increased from 4.81 to 5.28 euros.
While ASML's core operations are subject to the semiconductor industry's cyclical fluctuations, its EUV technology provides a significant advantage. ASML is the world's only producer of EUV lithography machines, the evolution of the deep ultraviolet (DUV) machines that dominate current semiconductor production.
EUV machines enable the production of advanced chips, which are increasingly popular in the AI era. This trend is likely to persist. Furthermore, ASML is poised to profit from the boom in new semiconductor foundries fueled by AI, the CHIPS Act, and the need for geographic diversification away from Taiwan.
ASML now anticipates revenue of 30 billion to 35 billion euros in 2025 and 44 billion to 60 billion euros in 2030. The company sees substantial growth opportunities in AI, projecting that global semiconductor sales will surpass $1 trillion by 2030, implying 9% compound annual growth.
With ASML likely to remain the sole producer of EUV machines, it enjoys a technological edge over competitors, and the required research and development and manufacturing costs are prohibitive.
Should You Buy ASML?
Following its Q3 earnings report, ASML seems to have limited downside potential at its current price.
The stock is trading at a price-to-earnings ratio of 39, which isn't inexpensive, but margins are expected to expand next year based on the company's guidance. ASML is forecasting a gross margin of 51% to 53% next year, and 56% to 60% by 2030, as EUV machines become an increasingly significant part of its business.
Finally, ASML projects double-digit EUV lithography growth annually through 2030, which should make the stock an attractive investment at its current valuation.
2024 has been a forgettable year for ASML, but the company's competitive advantages remain resilient. It looks poised to profit from AI growth, foundry expansion, and broader semiconductor industry expansion. The stock looks like a wise investment at its current valuation.
Despite the challenging circumstances, ASML has managed to demonstrate consistent year-over-year revenue growth, with an increase in Q3 revenue by 12%. This growth is attributed in part to the popularity of EUV machines in the AI era, a trend that is expected to continue.
Given ASML's technological edge as the world's only producer of EUV lithography machines and the high cost of research and development and manufacturing for competitors, investing in ASML could be a smart financial decision. The company's anticipated revenue growth and potential profit from AI, new semiconductor foundries, and the CHIPS Act make ASML an attractive investment opportunity, particularly at its current valuation.
