The Nasdaq Composite index has recovered impressively in the past six months with a gain of 10%, and this rally has rubbed off positively on shares of ASML Holding (ASML 0.23%).
Shares of the semiconductor bellwether -- whose lithography machines allow chipmakers and foundries to manufacture advanced chips -- have surged 12% in the past six months. ASML's rally is justified given the pace at which it is growing despite a slowdown in the semiconductor equipment market, driven mainly by its huge order backlog. A closer look at the semiconductor market and ASML's key metrics suggest that its terrific rally is here to stay.
ASML's growth isn't going to slow down
ASML's earnings nearly tripled in the first quarter of 2023 to $5.31 per share from $1.88 per share in the year-ago quarter. The company reported revenue of 6.75 billion euros ($7.24 billion) during the quarter, which was a big jump over the prior-year period's figure of $3.84 billion. Those numbers crushed Wall Street's estimates of $4.62 per share in earnings on $6.96 billion in revenue.
That was an impressive performance considering that the global spending on fabrication equipment is expected to decline a whopping 22% in 2023, according to industry association SEMI. It is also worth noting that ASML has guided for 24% year-over-year revenue growth in the current quarter to 6.75 billion euros at the midpoint of its guidance range. What's more, the company anticipates its full-year revenue to jump 25% along with an improvement in its gross margin.
There is one simple reason why ASML is growing at such an impressive speed even at a time when the overall semiconductor market is struggling -- the company's moat. As the only manufacturer of extreme ultraviolet lithography (EUV) lithography machines, companies have made a beeline for ASML's equipment as it allows them to shrink the size of chips and deliver advanced semiconductor solutions that are faster and more energy efficient.
This puts the company in a solid position to benefit from fast-growing niches, such as artificial intelligence (AI), where the demand for advanced chip nodes is high. For instance, foundry giant Taiwan Semiconductor Manufacturing -- popularly known as TSMC -- saw a 43% year-over-year jump in revenue from sales of 5-nanometer (nm) chips last quarter. That wasn't surprising as the company's customers, such as Nvidia, are using the 5nm node to make data center graphics cards that power generative AI applications.
ASML is the only company whose EUV machines can help chipmakers manufacture advanced chips based on 7nm, 5nm, and 3nm processes. This monopolistic position also explains why the Dutch giant had a massive order backlog worth 39 billion euros at the end of the first quarter, which exceeds the company's 2023 revenue forecast of 26 billion euros.
The size of the backlog indicates that ASML is on track to sustain its outstanding growth in 2024 as well. More importantly, the booming demand for artificial intelligence chips should continue to drive the need for ASML's machines. After all, the market for AI chips is expected to grow at almost 30% a year over the next decade, which explains why the demand for smaller chips is expected to remain high.
TSMC, for instance, points out that the demand for its 3nm chips will exceed supply in 2023 and drive multiyear growth for the company. The Taiwanese giant also points out that it will start making chips using the 2nm process node in volume from 2025. As these chips are extensively based on EUV lithography, it is not surprising to see why companies have already placed orders for ASML's machines even before they have been commercially launched.
Additionally, an improvement in semiconductor equipment spending from 2024 should act as another catalyst for ASML. It is estimated that spending on wafer fabrication equipment could spike 21% in 2024 to $92 billion. Even better, the semiconductor manufacturing equipment market is expected to clock nearly $150 billion in revenue by 2028, suggesting that the company is built for long-term growth.
Time to buy ASML stock hand over fist
Analysts are expecting an acceleration in ASML's growth over the next three years.
ASML Revenue Estimates for Current Fiscal Year data by YCharts
The chart above tells us that analysts have raised their revenue expectations for the company, and that's not surprising given the points discussed above. The good part is that investors can still buy this semiconductor stock at a relatively attractive valuation. It is trading at 33 times trailing earnings as compared to its five-year average price-to-earnings ratio of 41.
Also, ASML sports a price-to-sales ratio of 10.6, which is in line with its five-year average sales multiple. These multiples may seem high, but they look justified considering ASML's impressive growth, strong moat, bright prospects, and ability to deliver more upside. For example, if ASML's revenue does jump to $38 billion in 2025, as indicated in the chart above, and it continues to command a sales multiple of 10.6, its market cap could increase to $400 billion.
That would represent a 58% jump from the company's current market cap of $253 billion, which is why investors should consider buying this hot Nasdaq stock hand over fist before it flies higher.
