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Is It Too Late to Buy This Semiconductor Stock After 58% Gains?

By Harsh Chauhan – Updated Aug 3, 2021 at 10:24AM

Key Points

  • The growing appetite for semiconductors has turned out to be a boon for ASML.
  • The company has seen a sharp spike in revenue and earnings as the demand for its manufacturing equipment has increased.
  • ASML is unlikely to run out of momentum anytime soon because its growth drivers are here to stay for a long time.

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The booming demand for chips has been a catalyst for this tech stock.

Shares of Dutch semiconductor giant ASML Holding (ASML -0.86%) have done well so far in 2021, rising around 58% on the back of the growing demand for chip manufacturing equipment that has supercharged its revenue and earnings growth.

ASML Chart

ASML data by YCharts.

Known for supplying photolithography machines to semiconductor manufacturers, the demand for ASML's offerings has spiked big time. Not surprisingly, it delivered terrific second-quarter results recently that crushed Wall Street's expectations. More importantly, the company is unlikely to run out of steam anytime soon, as it is sitting on a fat order book and has outstanding prospects that should ensure long-term growth.

That's why investors who have missed the ASML gravy train so far need not worry because the stock can run higher. Let's see why that may be the case.

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Image source: Getty Images.

ASML is on a roll

ASML's second-quarter revenue shot up 21% year over year to 4 billion euros ($4.8 billion), while diluted net income increased to 2.52 euros per share ($3.00) from 1.79 euros in the year-ago period. Analysts were expecting 2.47 euros in EPS on revenue of 4.1 billion euros. ASML missed the top-line estimate by a whisker because it saw 300 million euros' worth of revenue shift into the third quarter. Two of the lithography systems it shipped during the quarter were pending customer acceptance on account of testing.

ASML will recognize revenue from the sale of these systems once customer acceptance is complete in the current quarter. Investors, however, should focus on the bigger picture, as ASML has raised its full-year guidance thanks to a terrific growth in orders. The company now expects 2021 revenue to jump 35% as compared to its earlier expectation of a 30% increase.

But don't be surprised to see ASML raise its revenue guidance further as the year progresses. That's because the company's order book is extremely robust, with a backlog worth 17.5 billion euros (roughly $20.7 billion at the current exchange rate). It is worth noting that it received orders worth 8.3 billion euros in the second quarter, which was more than double its actual revenue. Of this, 4.9 billion euros' worth of orders were placed for extreme ultraviolet (EUV) lithography systems.

What's more, ASML pointed out that its order book contains 10.9 billion euros' worth of orders for EUV lithography equipment, which covers "approximately 80% of the planned EUV output for 2022." All told, ASML's guidance appears to be solid for this year and the next, and it won't be surprising to see the company maintain its terrific momentum beyond the next two years.

Why it isn't too late to buy the stock

ASML is the leader in the market for lithography machines, with a share of 62%, and it has a monopolistic position in the EUV space. This puts the company in a terrific position to benefit from the growth in global chip demand. According to a third-party estimate, the EUV lithography market could exceed $13 billion in value by 2024 versus just $2.1 billion in 2018.

At the same time, ASML's installed base business that provides service and upgrades to chipmakers is going to be a solid tailwind. The segment produced 1.1 billion euros in revenue last quarter, recording nearly 21% year-over-year growth and accounting for just over 26% of total revenue.

The company posted stronger-than-expected growth in this segment because customers are looking to generate more output from their current infrastructure. As a result, ASML now expects this segment to grow 15% in 2021, up from a prior estimate of 10%. As ASML sells more of its EUV systems, the service and upgrades business should also remain in fine form going forward.

Thanks to all these tailwinds, it isn't surprising to see analysts expect ASML's earnings to grow at an annual rate of nearly 30% for the next five years. Of course, investors who have missed the ride so far will have to pay a pretty penny, as ASML trades at 56 times trailing earnings, which is quite expensive compared to the S&P 500's multiple of 35. However, investors will be getting into a top growth stock that could deliver robust upside in the long run.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends ASML Holding. The Motley Fool has a disclosure policy.

Stocks Mentioned

ASML Stock Quote
ASML
ASML
$600.51 (-0.86%) $-5.20
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$4,030.27 (-1.02%) $-41.43

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