What happened
After plunging just over 40% in the first half of 2022, shares of European semiconductor equipment manufacturer ASML Holdings (ASML +3.42%) rallied 10.5% in the second half of the year, according to data from S&P Global Market Intelligence.
ASML found itself a victim of the growth stock sell-off in the first half of the year, which was then compounded by fears over a cyclical downturn in the semiconductor sector and new China regulations. However, the company appeared to put those concerns to rest by delivering strong results in the third quarter, then actually raising its long-term forecasts at its Investor Day in November.
NASDAQ: ASML
Key Data Points
So what
Fears around the current chip downturn and recession for ASML appeared to subside in October, when the company delivered strong revenue and earnings results above analyst expectations in an adverse environment. Optimism for an eventual recovery only grew in November, when the company held its Investor day.
Despite the industry entering a downturn in 2022, ASML raised its 2025 revenue and earnings targets over its 2021 Investor Day, and also forecast solid continued growth through 2030. And keep in mind, ASML has a recent history of handily beating its long-term targets.
How could ASML be raising its long-term targets, when so many companies in the semiconductor industry, particularly in PCs and mobile phones, are lowering them?
One reason is that ASML has a monopoly on key extreme ultraviolet lithography (EUV) technology that enables semiconductor production with transistors 7 nanometers apart and below -- a threshold the logic industry crossed a few years ago. This is the "leading edge," and electronic device manufacturers are always going to want to move to the latest technology every year.
While the industry may go through its ups and downs, over the long term, semiconductors will grow, likely above gross domestic product. Furthermore, the amount of time and money needed to get a leading-edge plant up and running is substantial, which means investment in chip production is likely to be steadier than end chip sales themselves. And since both Intel and Samsung are investing heavily in an attempt to catch up to Taiwan Semiconductor Manufacturing in leading-edge capabilities no matter the current environment, ASML's sales should remain in steady growth mode. Furthermore, DRAM memory manufacturers are just now starting to use EUV in DRAM production, adding another leg of growth.
Regarding the surprising raise to its long-term targets, ASML management specifically pointed to an increase in projections for servers for artificial intelligence as a key driver of its new upside forecast, as well as an increased forecast for virtual reality headsets and associated infrastructure for the metaverse. In addition to these increases at the leading edge, the passage of the Inflation Reduction Act and other green initiatives are accelerating the outlook for trailing-edge power semiconductors, which utilize ASML's legacy deep ultraviolet (DUV) lithography machines.
Finally, thanks the passage of the CHIPS Act and other semiconductor subsidies passed by developed nations, ASML now forecasts as much as 10% higher capital equipment sales by 2030, due to this "re-shoring" inefficiency. While that may make some semiconductors a bit more expensive or hurt margins for some chip designers, it's only a positive for equipment companies such as ASML.
Now what
After a strong second half and a strong start to 2023, ASML is no longer quite as cheap as it once was, trading around 32 times 2023 earnings estimates. On the other hand, it's not often one finds a stock with a monopoly on key technology, and with high visibility into profit growth for a decade or more. That's why ASML should at least be on investors' watch lists in the case of another material pullback, and those without a position may want to think about starting one, even at these levels.
