Wall Street was ecstatic following the July 20 release of ASML Holding's (ASML -1.10%) second-quarter 2022 earnings report, and share prices of the Dutch semiconductor bellwether jumped over 5%.
ASML stock is now up 19% in July. This should come as a relief to ASML investors, as the stock endured a chaotic period for most of the year amid the broader tech sell-off. But does this mean that investors who were waiting on the sidelines for ASML to get cheaper have lost an opportunity to buy shares in a company that helps the world's semiconductor foundries produce chips that power a wide variety of applications? Let's find out.
ASML is expensive, but investors should look past the valuation
ASML stock is trading at 41 times trailing earnings following its surge this month. The price-to-sales ratio has gone up to 12. These multiples are higher than ASML's five-year average earnings ratio of 40 and sales multiple of 10. Still, the stock is cheaper than last year when it was trading at 53 times earnings and 16 times sales.
Additionally, ASML's forward price-to-earnings ratio of 32 suggests that its bottom line is expected to get better in the coming year. What's more, analysts expect the company's earnings to grow at an annual rate of almost 30% for the next five years.
It is not surprising to see that analysts are upbeat about ASML's long-term prospects. The company's lithography machines are used by the world's major chip foundries to make integrated circuits. More importantly, ASML's customers, such as Intel, Taiwan Semiconductor Manufacturing, and Samsung, among others, are making a beeline for its machines in a bid to produce smaller, more powerful, and more efficient chips.
This was evident from ASML's latest quarterly results -- the company's backlog increased substantially, indicating that it isn't going to run out of steam any time soon.
The semiconductor bellwether is built for long-term growth
ASML reported second-quarter revenue of 5.44 billion euros, or $5.79 billion, for the June quarter. The top line jumped 35% year over year and beat the consensus estimate of 5.28 billion euros. The company delivered 1.4 billion euros (or $1.44 billion) in net income, up 36% over the year-ago period.
ASML's impressive year-over-year growth was driven by an increase in sales of its lithography systems, which are used to print integrated circuits. It sold 83 new lithography systems during the quarter, up from 69 in the prior-year period. Even better, the company recorded net bookings worth 8.5 billion euros during the second quarter.
The net bookings refer to the systems sales orders for which ASML has received written authorizations. That means the company's order book grew at a faster pace than its actual revenue. As a result, ASML's total order backlog now stands at 33 billion euros, of which 85% is for advanced chip nodes that major semiconductor foundries are now adopting.
It is worth noting that ASML has generated 9 billion euros in the first six months of 2022, and expects to finish the year with 10% revenue growth over 2021 revenue of 18.6 billion euros. As such, the company's massive backlog indicates that its solid revenue growth could continue for a long time to come.
Of course, the company is set to struggle on account of supply chain disruptions in the near term. The shortage of components is forcing ASML to delay revenue recognition from the machines it has already shipped to customers. In the third quarter, for instance, ASML expects revenue between 5.1 billion euros and 5.4 billion euros. That excludes 1.1 billion euros of delayed revenue from machines that will be shipped to customers through its fast shipment program, under which ASML ships machines to customers without final testing.
The revenue from the fast shipments is recognized on the income statement once the final testing happens at the delivery site and the customer takes formal acceptance. For 2022, ASML points out that the value of fast shipments should increase to 2.8 billion euros, compared to its earlier estimate of 1 billion euros, indicating that the company now sees a bigger chunk of its 2022 revenue moving into 2023.
Given that ASML is going to play a key role in serving the world's demand for semiconductors in the long run, it would be prudent for investors to focus on the bigger picture, as it has a monopoly on the EUV (extreme ultraviolet) lithography machines that are needed to make smaller, powerful, and more efficient chips.
As such, investors looking to buy a top semiconductor stock can still buy shares of ASML, as it could turn out to be a solid long-term bet given its huge backlog and the market that it serves.