What Recession? This Semiconductor Stock Just Projected Explosive Upside

The market is very down on the semiconductor sector, and it's understandable. In fact, PC sales are in one of the worst yearly declines in the past 30 years. Meanwhile, the iShares Semiconductor ETF (SOXX 1.30%) is down about 30% on the year.

Against that backdrop, it may be surprising that semiconductor equipment leader ASML Holdings (ASML -1.03%), a key provider of semiconductor manufacturing equipment, just increased its 2025 revenue and profit outlook, over and above the projections given just one year ago in late 2021. Not only that, but ASML expects the good times to last through 2030 as well.

If anything, one would have thought ASML would be lowering, not raising, its outlook. Here's what ASML is seeing, and why semiconductor investors may want to look through the year ahead and take advantage of today's low prices. Afterall, even Warren Buffett is buying into the sector.

Higher growth through 2030, despite a 2023 downturn

By 2025, ASML now expects its revenue to double over 2021 – a significant increase from the guidance given just one year ago, along with similar gross margins and only slightly more operating expenses. Not only that, but ASML decided to guide out another five years to 2030. ASML sees revenue growing another 50% on top of its 2025 projections, and with expanding gross margins to boot.

Data source: 2022 Investor Day presentation. Operating margin is the midpoint of given ranges. Revenue figures in euros.

Even though the economic outlook has deteriorated over the past year, ASML's projections beyond this downturn actually increased.

As the only supplier of key extreme ultraviolet technology (EUV) for leading-edge nodes, as well as the dominant supplier of deep ultraviolet lithography (DUV) for all nodes, ASML is deeply embedded with its customers' long-term plans and outlooks.

Thus, it appears that even though we might have a near-term cyclical downturn, the secular growth prospects of semiconductors have actually strengthened.

Artificial intelligence, the Metaverse, and electrification

There are several causes for ASML's increased view on semiconductor demand, happening on both advanced and mature nodes.

On advanced nodes, it appears ASML is now seeing the long-term demand for servers increasing above its prior forecast. In addition, it's also seeing an increase in the amount of augmented and virtual reality headsets and infrastructure.

ASML pointed to a general increase in the use of both artificial intelligence and intelligent edge devices, driving the need for more servers to execute the high-powered computing necessary for these game-changing applications. In addition, it was only one year ago that Meta Platforms (META -0.52%) announced its name change and big push to create the Metaverse, and that probably wasn't factored into ASML's projections at the time.

Of course, given Meta's struggles this year, some may be questioning whether there really will be increased AR and VR headsets above and beyond last year's figures. However, the large cloud titans didn't appear to be shying away from their spending plans last quarter, despite slowing revenue growth. That seems to indicate the artificial intelligence story, which requires a ton of computing power, is for real.

In addition to these leading-edge applications, the electrification revolution, both in the automotive and electricity generation and distribution sectors, will require a huge increase in semiconductors made on mature nodes.

For instance, electric vehicle sales are projected to accelerate, and EVs require twice the semiconductor content of internal combustion cars, with more autonomous features growing semi content even further beyond that. Moreover, both wind and solar generators require lots of power semiconductor content, and will also require a smarter electric grid to help store and distribute the variable electricity generation that comes from both wind and solar power. A smarter grid will also entail more chip content.

And there are additional accelerators for semicap equipment growth 

In addition to the growth in these end-market applications, there are additional drivers for semiconductor capital intensity, which means even greater opportunity for semiconductor equipment stocks to benefit further than their chip design customers.

First, chips will have to get bigger, thereby taking up more space on the wafer and neccessitating  more tools to generate the same amount of chips. This is because Moore's Law is slowing down, making it more difficult to pack more and more transistors closer together on the same chip. Furthermore, highly dense chips require more energy to run efficiently.

With electricity prices surging in the face of rising natural gas prices today, energy efficiency is certainly coming to the forefront. The answer to this is that chips will have to get bigger in order to deliver leading-edge performance along with the required energy efficiency. 

Equipment suppliers will also get a boost from the push for technology sovereignty, whereby all advanced nations want some chip capacity on their shores. As of today, chip production is highly concentrated in East Asia, but developed nations see this as a vulnerability. In addition, the world's leading foundries are currently engaged in fierce competition, with Intel and Samsung aggressively building their foundries over the next few years to attempt to compete with current foundry leader Taiwan Semiconductor Manufacturing.

ASML believes the national subsidies and investments, such as the CHIPS Act in the U.S., as well as that industry competition, could lead to "inefficiency," and therefore even higher capacity than what will be required by the higher projected demand. In total, ASML thinks that inefficiency could expand the equipment market by an additional 10% by 2030.

How can the industry afford this?

If ASML sees a bigger slice of the pie for itself, some may wonder where all the money for this investment will come from. To that point, ASML pointed out that its customers, including foundries, designers, original equipment manufacturers, and internet giants made a collective $688 billion in operating profits last year.

Given that semiconductor equipment revenues and profits make up a relatively low percentage of those overall tech sector profits, ASML believes these companies can afford to keep driving innovation this decade. As such, ASML believes the semiconductor equipment subsector should be more of a growth industry, and perhaps not as cyclical as perceived by the market.

Of course, the proof will be in how ASML and its peers get through the next year. Yet for those with a longer time horizon, major semicap equipment stocks look like solid bets through 2030 -- especially after this year's pullback.