What happened
The clouds of uncertainty that plagued shares of ASML Holdings (ASML 3.38%) throughout much of 2022 are beginning to fade, and investors are slowly growing more comfortable buying into this key supplier to the semiconductor manufacturing industry.
Shares of ASML climbed 19.6% in January, according to data provided by S&P Global Market Intelligence, on renewed hope that the company's growth will pick up in the quarters to come.
So what
ASML manufactures the extreme ultraviolet lithography (EUV) machines that are used to make the world's most powerful semiconductor chips. It is a niche business, but a lucrative one. ASML is the only company in the world that can supply chipmakers with the tools they need to make the most advanced high-end chips, and its competitors are by some estimates upwards of a decade behind it in their R&D.
That gives ASML an enviable moat, but investors over the past year have been more focused on the headwinds it faces. Chip demand tends to decline in soft economies, and ASML's customers, including Taiwan Semiconductor, Samsung, and Intel, have seen demand fall.
There are also geopolitical concerns. Taiwan Semi, ASML's most important customer, has been caught up in broader concerns about China's intentions surrounding Taiwan. And chipmakers and equipment suppliers including ASML are under increasing pressure from the United States and other Western governments to withhold their most advanced technology from China, taking away a massive potential market for their products.
In January, stocks rallied on growing investor hope that a recession might be avoided. That would be good for a wide range of industries, including the semiconductor space. That demand for advanced chips will rise over the long term is undeniable: Advances in everything from personal computers and smartphones to automobiles and "smart" appliances are boosting demand for silicon. The question is how quickly that will translate into new manufacturing equipment sales, and the answer largely lies in how soon ASML customers expect demand will rebound.
ASML helped its own case late in the month when it announced its fourth-quarter results. The company reported solid sequential growth in terms of both earnings and sales, and said it expects revenues in 2023 will be 25% higher than they were in 2022.
Now what
Even with its January gains, ASML's stock price is basically flat over the past year. The semiconductor industry is notoriously cyclical, and investors remain cautious about what the next few quarters will bring for the sector. If business is slow for chipmakers, orders for new ASML equipment could slow down. And geopolitical tensions are unlikely to ease overnight.
But for long-term investors, ASML is an irreplaceable piece of one of the most important supply chains fueling continued tech innovation. There's great potential for ASML shares to appreciate over time.
