ASML Holding (ASML +1.74%) is not well-known among tech investors. The Netherlands-based enterprise produces semiconductor manufacturing equipment, including extreme ultraviolet lithography (EUV) machines. Chip manufacturers such as Taiwan Semiconductor (TSMC) and Samsung use that equipment to produce their most advanced chips.
Nonetheless, the stock experienced significant volatility over the last year and has remained expensive even as investors have soured on other semiconductor stocks. Hence, investors may wonder if a critical green flag for ASML stock outweighs a significant red flag.
Green flag: Market dominance in a critical niche
The cutting edge of the semiconductor industry often focuses on TSMC. According to TrendForce, it is responsible for more than half of the world's third-party (foundry) chip production and leads the sector technologically.
However, TSMC would not hold that lead without ASML. Notwithstanding Huawei's recent patent application, ASML is the only producer of EUV machines, at least in the Western world. In addition to supporting TSMC, ASML's cutting-edge technology makes the manufacture of the most advanced chips from Nvidia, AMD, Qualcomm, and others possible.
Moreover, the industry benefits from an increasing need for semiconductors as artificial intelligence, the Internet of Things, 5G, and other emerging technologies play increasingly critical roles in the world. ASML should also profit as the U.S. and Europe build more chip fabrication facilities within their borders to reduce the industry's concentration in Taiwan.
Furthermore, while the semiconductor industry hit a wall in 2022, that's not much reflected in ASML's numbers. For 2022, it forecasts its sales will rise by 13% to 21.1 billion euros ($22.5 billion). The company also believes it can generate between 44 billion euros ($47 billion) and 60 billion euros ($64 billion) annually by 2030, so investors should brace for rapid growth on all levels.
Red flag: Its valuation amid challenging conditions
Still, for all of its potential, investors have to ask whether ASML can profit them as an investment and whether now is the right time to buy.
That is a challenging question to answer. The stock currently is trading at a price-to-earnings ratio of about 37. While that is nowhere near the peak valuation ratio for ASML, it is not exactly a cheap stock, especially considering one can buy TSMC and Intel for around 13 times and 8 times their earnings, respectively.
Also, like TSMC, ASML is not immune to geopolitical challenges. With its market dominance, it faces tremendous pressure not to sell equipment to China. Furthermore, it depends heavily on neon gas in its manufacturing processes. Unfortunately for the company, at least 50% of the world's neon gas comes from war-torn Ukraine, according to the U.S. International Trade Commission.
Additionally, ASML may not be as discounted as it appears from a price perspective. It sells for just over $550 per share as of this writing, down nearly 40% from the high of just under $900 per share it hit in August 2021.
NASDAQ: ASML
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However, that is nowhere near the intraday 52-week low of just over $363 per share it touched in mid-October. From that point, it increased by more than 50% in less than three months. Since other chip stocks have not matched that rate of increase during that time, ASML stock could struggle to move higher in the near term.
Should I consider ASML?
The recent surge in its stock price should not deter investors from buying ASML. The stock remains attractive even after the increase. Indeed, that recent rise increases the odds of a pullback, especially in the current market.
Still, the chip industry has recovered from every historical downturn, and the current one is unlikely to prove an exception. Moreover, the world's rising need for cutting-edge chips cannot be fully met without ASML's EUV machines, a factor that could make ASML a top semiconductor stock to buy for 2023.
