Is ASML Holding Stock a Buy Now?

ASML Holding (ASML -0.73%) posted its fourth-quarter earnings report on Jan. 25. The Dutch semiconductor equipment maker's revenue rose 29% year over year to 6.43 billion euros ($6.99 billion), which exceeded analysts' expectations by 50 million euros. Its net income grew 2% to 1.82 billion euros ($1.98 billion), or 4.60 euros per share, and also beat analysts' estimates by 0.27 euros.

For the full year, ASML's revenue grew 14% to 21.17 billion euros ($23.02 billion), but its earnings per share dipped 2% as inflation and higher supply chain costs squeezed its gross margins. So should investors pick up some shares of ASML before the broader semiconductor sector recovers?

Image source: Getty Images.

How fast has ASML been growing?

ASML is the world's largest producer of photolithography systems, which are used to etch circuit patterns onto silicon wafers. It's also the only vendor of high-end extreme ultraviolet (EUV) lithography systems, which are used to produce the world's smallest chips. The industry's most advanced chip foundries -- Taiwan Semiconductor Manufacturing (TSM -1.67%), Intel (INTC 1.74%), and Samsung -- all use ASML's EUV systems to manufacture their top-tier chips.

ASML's monopoly on that crucial technology makes it a linchpin of the semiconductor market. Between 2018 and 2022, ASML's annual revenue rose from 10.9 billion euros to 21.2 billion euros, representing a compound annual growth rate (CAGR) of 18.1%. Its annual gross margin also expanded from 46% in 2018 to 50.5% in 2022. But as the following table illustrates, ASML's revenue and earnings growth didn't exactly follow a straight line.

Data source: ASML. YOY = Year over year.

ASML suffered a major slowdown in 2019 as sales of smartphone and memory chips stalled out, but its growth accelerated again in 2020 and 2021 as sales of chips for 5G devices, PCs, and data centers skyrocketed. The COVID-19 pandemic amplified that growth as more people upgraded their mobile devices and PCs to work from home, while the surging usage of cloud-based services forced data centers to upgrade their hardware.

However, the overproduction of chips to meet that demand created a supply glut in a post-pandemic market as those tailwinds dissipated. That's why many chipmakers -- especially those that serve the PC and smartphone markets -- are now suffering cyclical slowdowns, and it's why ASML's growth decelerated in 2022. But most chipmakers, including ASML's top customer, TSMC, expect the sector to warm up again in the second half of 2023 as the supply-demand balance is restored.

Is ASML's cyclical slowdown ending?

ASML expects its revenue to rise by at least 25% in 2023. That acceleration can be partly attributed to the delayed recognition of about 3.1 billion euros ($3.4 billion) in revenue from its "fast shipments" in 2022. In a fast shipment, ASML skips some factory tests and delays the recognition of its fees to install its EUV systems as quickly as possible. That practice became common during the chip shortages in 2020 and 2021, but it's becoming less so as the chip market cools off.

The rest of that acceleration can be attributed to ASML's outlook for a broader market recovery in the second half of 2023. The market's demand for new PC, smartphone, and data center chips might remain wobbly, but TSMC, Intel, and Samsung need to keep installing ASML's pricey EUV systems to ramp up the production of their highest-end chips.

A lot of ASML's future growth will come from its EUV systems, which accounted for more than half its bookings in the fourth quarter, but the market's demand for its older deep ultraviolet (DUV) systems, which are used to produce a wide range of lower-end chips, should also stay robust (especially in China, where the company has been barred from selling EUV systems).

Is ASML still a good long-term investment?

Last November, ASML predicted it could generate 30 billion euros ($32.6 billion) to 40 billion euros ($43.5 billion) in revenue in 2025, based on its expectations for the chip market. It also predicted it could generate 44 billion euros ($47.8 billion) to 60 billion euros ($65.2 billion) in revenue in 2030. To hit the midpoint of that forecast, ASML would need to grow its revenue at a CAGR of 11.8% from 2022 to 2030. It also expects its gross margin to expand from 50.5% in 2022 to between 56% and 60% in 2030.

We should take those long-term estimates with a grain of salt, but we should also recall that ASML previously surpassed the highest end of its 2016 and 2018 investor targets ahead of schedule. If it actually generates 60 billion euros in revenue in 2030 and its valuations hold steady, its stock could easily triple from its current price in just seven years.

ASML's stock isn't cheap at around 33 times forward earnings, but its monopolization of a key chipmaking technology and its unmatched pricing power easily justify that slight premium. Therefore, I believe ASML is still one of the best semiconductor stocks for long-term investors to simply buy and hold.