Since bottoming out in mid-October, shares of chip manufacturing equipment company ASML Holding (ASML 2.04%) are up nearly 60% (as of this writing in mid-November). The top semiconductor stock may be far from finished, though, especially when looking at its potential over the next five to 10 years or so. Here are a few essential points to consider from the company's recent investor day presentation.
Chips, chips, and more chips!
Semiconductors have become ubiquitous, riding around in our pockets, powering business operations, and helping manufacture other non-techie products at a fast and efficient pace. But as prevalent as they've become, even more chips are in demand.
Early in 2022, it was revealed that global semiconductor sales topped $600 billion for the first time. Various industry estimates (from analysts and chip company executives alike) started predicting that sales would near $1 trillion a year by 2030. But during its 2022 investor day in November, ASML shared new reports that now estimate global annual sales of chips could actually reach as high as $1.3 trillion by 2030.
What's impressive about this new-and-improved outlook is that it comes at a time that investors are fretting about an economic slowdown -- maybe even a recession -- in 2023. Someone forgot to tell the semiconductor industry.
This is fantastic news for semiconductor stocks in general, but in particular for a company like ASML. The company has a monopoly on extreme ultraviolet lithography (EUV) equipment, the technology used to make the most advanced chips used in high-end smartphones and high-performance computing like data centers. These high-end processing units are expected to be the fastest-growing segment of the market in the outlook for the next eight years.
However, even more mature manufacturing processes used for chips in automobiles and industrial equipment are expected to grow too. ASML's slightly older deep ultraviolet lithography (DUV) equipment is increasingly needed to support this segment of the market as it seeks to boost production while keeping expenses in check. ASML has some competition in DUV technology (Japan's Canon and Nikon), but this is a massive market as it is. Add in mid-single-digit percentage growth, and there will be plenty of opportunity for all three of these companies to sell DUV machines to chipmakers in the coming years.
How does ASML know the future?
This rosy outlook that prognosticates deep into the future brings up a question: How can ASML be so sure about its trajectory years down the road?
Bear in mind that while chips are tech, they're also a manufacturing business -- one of the most (or arguably the most) complex manufacturing industries around. Chip companies have to share their product roadmap and development plans with each other, as well as share demand trends and ordering activity from customers to get the job done.
And ramping up production of new chips, let alone a surge in chip volume driven by demand from something as huge as the automotive industry, is no small task. It takes many years of planning and tens of billions of dollars to build and upgrade chip fabrication facilities (or simply fabs). No semiconductor company is an island!
Thus, for a company like ASML, it has to have deep knowledge of its peers' plans. An ASML EUV machine costs hundreds of millions of dollars. One of these monsters isn't simply ordered and then delivered tomorrow in an e-commerce delivery truck. Orders are placed years in advance, and entire fabs are designed around their placement.
Suffice to say that while chip sales can be volatile from one year to the next, ASML and other chip companies have a high level of visibility into the direction the industry is headed long term.
What does this mean for ASML stock?
There are a lot of moving parts to the semiconductor space, and thus a lot of variables impacting ASML's long-term financial outlook. However, the company now sees revenue being in a range of 30 billion to 40 billion euros by 2025 (compared to its outlook for 24 billion to 30 billion euros provided at the 2021 investor day). And by 2030, ASML thinks its revenue could be 44 billion to 60 billion euros.
For reference, trailing-12-month revenue was 18.6 billion euros in 2021, and is more than 21 billion euros over the last trailing-12-month period. At the midpoint of 2025 guidance (35 billion euros), ASML forecasts an average annual growth rate of over 18%. And at the midpoint of 2030 guidance (52 billion euros), the forecast implies average annual growth of 12%.
Along the way, ASML will remain highly profitable, and plans to continue doling out its dividend (currently yielding 1.1%) and repurchasing shares. Thus, earnings growth could be even higher than 12% over the next eight years. That adds up to a potential market-beating stock (given the S&P 500 averages about 10% per-year growth).
After its epic one-month rally, ASML now trades for 25 times trailing 12-month free cash flow. It isn't cheap like it was just weeks ago. However, given the visibility the company has into the growth trajectory for the semiconductor industry -- and thus for itself -- shares are still very much a reasonable value at this juncture.
