In 2022, many tech giants -- including Amazon, Alphabet, and Tesla -- split their stocks. While stock splits don't make stocks fundamentally cheaper, their lower trading prices often attract a lot of attention from smaller retail investors who weren't previously willing to pay hundreds or thousands of dollars for a single share.
One stock that might be ripe for a split in 2023 is ASML (ASML 2.24%), the Dutch semiconductor equipment maker that trades at around $550 per share. ASML has already split its stock four times, including 2-for-1 splits in 1997 and 1998, a 3-for-1 split in 2000, and an 8-for-9 reverse split (which was used to optimize its capital structure) in 2007.
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What does ASML do?
ASML is the world's largest manufacturer of photolithography systems, which are used to etch circuit patterns on silicon wafers. It's also the only producer of extreme ultraviolet (EUV) lithography systems, which are required to manufacture the world's smallest and densest chips.
A single EUV system costs up to $200 million and requires multiple planes to ship. Its largest customer, TSMC, can't produce its most advanced chips without ASML's EUV machines. Its other major EUV customers include TSMC's rivals Samsung and Intel.
ASML also supplies older deep ultraviolet (DUV) lithography systems to other chipmakers like Texas Instruments. Its smaller competitors in that market include Canon and Nikon.
NASDAQ: ASML
Key Data Points
How fast has ASML been growing?
ASML's dominance of the photolithography market makes it a linchpin of the global semiconductor market. That's why its annual revenue increased at a compound annual growth rate (CAGR) of 22% between 2016 and 2021 while its annual gross margin expanded from 44.8% to 52.7%.
ASML maintained that impressive growth trajectory even as it withstood a chip glut in 2019 (caused by the slowdown of the smartphone and PC markets) and disruptions from the trade war and the pandemic in 2020. That resilience suggests the company will easily bounce back from the current cyclical downturn in chip sales, which was triggered by slower sales of PCs in a post-pandemic market and macroeconomic headwinds for the enterprise sector.
During ASML's latest investor day presentation last November, it predicted it could generate 30 billion to 40 billion euros ($42.9 billion) in revenue in 2025 with a gross margin of 54%-56%. By 2030, it expects to generate 44 billion to 60 billion euros ($64.4 billion) in revenue with a gross margin of 56%-60%.
The midpoint of that forecast implies ASML can grow its annual revenue at a CAGR of 12% from 2021 to 2030. The top end of that guidance also means ASML's revenue will nearly triple from its 2022 estimate of 21.2 billion euros ($22.7 billion).
But will a stock split change anything?
If ASML does a 10-for-1 stock split and reduces its price from about $550 to $55, it won't change anything about the company. It's simply letting you buy a single slice of the same pizza instead of the whole pie.
Many brokerages also provide fractional trades now, which make stock splits even less relevant for smaller retail investors. Nevertheless, a split might still generate some fresh media buzz and capture the attention of new investors.
The main impact of a stock split will likely be felt in the options market, where a single contract is tethered to 100 shares. Right now, a single options contract for ASML is still pinned to $55,000 in underlying shares. A 10-for-1 stock split would lower that threshold to $5,500 and encourage more options trading among smaller investors.
Heavier options trading, along with a lower stock price, could make ASML a more actively traded stock. That increased liquidity could bring in more active traders, but it shouldn't affect long-term investors who care more about ASML's role in the secular expansion of the semiconductor market instead of its near-term price swings.
Will ASML split its stock in 2023?
I don't think a stock split will be a top priority for ASML this year. Retail investors aren't enthusiastic about semiconductor stocks right now, and splitting its shares would arguably seem like a desperate cry for attention.
Investors shouldn't care if ASML splits its stock or not. Instead, they should appreciate ASML's monopolization of a crucial semiconductor technology, its unmatched pricing power, and its long-term growth potential. I believe those strengths make it one of the best semiconductor stocks to hold over the next decade.
