ASML (ASML -0.15%) posted its third-quarter earnings report on Oct. 19. The Dutch semiconductor equipment maker's revenue rose 10% year over year to 5.78 billion euros ($5.66 billion), but its net income dipped 2% to 1.70 billion euros ($1.66 billion) and its earnings grew by less than 1% to 4.29 euros ($4.20) per share.

ASML's headline numbers were stable, but its stock was cut in half this year as investors fretted over the broader slowdown of the semiconductor sector and rising interest rates. But could ASML actually be a great long-term investment at these levels? Let's review four reasons to buy ASML -- as well as one reason to sell it -- to decide.

Two silicon chip wafers.

Image source: Getty Images.

1. It still monopolizes a crucial semiconductor technology

ASML is the world's largest manufacturer of photolithography systems, which are used to etch circuit patterns onto silicon wafers. It's also the world's only producer of high-end EUV (extreme ultraviolet) lithography systems, which cost about $200 million each and require several planes to ship.

The world's most advanced chip foundries -- TSMC, Samsung, and Intel -- all use ASML's EUV systems to manufacture their smallest and densest chips. ASML's monopolization of this crucial technology makes it a linchpin of the semiconductor sector, and it doesn't face any competitors in its high-end niche.

That makes it one of the most balanced long-term plays on the secular expansion of the semiconductor market, which will continue to grow over the next few decades as more advanced consumer electronics, vehicles, data centers, industrial robots, and Internet-of-Things (IoT) gadgets hit the market. 

2. It generates stable (albeit cyclical) revenue growth

ASML's growth is cyclical. Its last downturn occurred in 2019, when the semiconductor industry struggled with the slowdown of the smartphone market and a supply glut of memory chips. It faces another slowdown this year, but that deceleration can mainly be attributed to its decision to ship out its systems to foundries at a faster rate (and recognize the revenue later) to tackle the ongoing chip shortage instead of waning demand for those systems. 

Fiscal Year

2022*

2021

2020

2019

2018

Revenue (euros) 

21.1 billion 

18.6 billion

14 billion

11.8 billion

10.9 billion

Growth (YOY)

13%

33%

18%

8%

22%

Data source: ASML. YOY = year over year. *Company's latest outlook.

ASML's revenue should continue to rise over the long term. Last September, it predicted it would generate 24 billion to 30 billion euros in revenue in 2025 -- based on its own "low" and "high" expectations for the global semiconductor industry. So its revenue should keep rising year over year even if the broader chip market cools off. ASML will likely narrow those long-term expectations at its upcoming investor day on Nov. 11.

3. Its unmatched pricing power boosts its long-term margins

ASML's dominance of the photolithography market gives it plenty of pricing power. That's why its gross margins have consistently bounced back and expanded through its previous cyclical downturns.

Fiscal Year

2022*

2021

2020

2019

2018

Gross margin

~50%

52.7%

48.6%

44.7%

46%

EPS growth (YOY)

(6%)**

69%

38%

1%

27%

Data source: ASML. YOY = year over year. *Company's outlook. **Analysts' estimates.

ASML expects its gross margin to dip to just under 50% this year, but it will likely expand again as it ships a higher mix of its pricier EUV systems in comparison to its cheaper DUV (deep ultraviolet) systems for lower-end chipmakers.

4. It sees a limited impact from the export bans against China

The Biden administration recently banned U.S. companies from exporting advanced semiconductors, semiconductor equipment, and related services to China. That decision rattled the semiconductor sector, but it doesn't meaningfully affect ASML, which generated 15% of its net system sales in China last year.

There are two reasons for this. First, ASML is a Dutch company. The Dutch, under pressure from the Trump administration, had already blocked ASML from selling its EUV systems to leading Chinese chip foundries like SMIC in 2020.

Second, ASML mainly sells DUV systems, which are used to manufacture older and larger chips, to Chinese chipmakers. Those systems aren't covered by the Biden administration's ban on "advanced" chips that are manufactured at or below the 14nm node. That's why it wasn't surprising when ASML CEO Peter Wennink said the latest U.S. export bans against China would merely have a "limited" impact on its system shipments in 2023.

1 reason to sell ASML: Its valuation

ASML's core business is still strong, but its stock simply isn't that cheap at 24 times next year's earnings. Two of its top customers, TSMC and Intel, currently trade at 11 and nine times forward earnings, respectively. That higher valuation could limit its upside potential as rising interest rates continue to weigh down the market.

The softness of the euro against the U.S. dollar could also exacerbate that pain for U.S. investors, who have watched their American Depositary Receipts (ADR) shares drop at a much faster rate than the underlying euro-denominated shares in Amsterdam.

Those concerns are all valid, but I believe ASML's stable growth and unmatched pricing power still justify that higher valuation. Its near-term gains could be limited, but its long-term outlook still looks exceptionally bright.