Nvidia (NVDA 6.18%) has been one of the hottest stocks on the market in 2023 thanks to the surging adoption of artificial intelligence (AI) applications. Shares of the semiconductor giant are up by 205% year to date as of this writing, and not surprisingly, it now trades at an extremely rich valuation.
The chipmaker's price-to-sales ratio stands at a whopping 44, while its trailing earnings multiple is 237. Investors may not be comfortable buying Nvidia at such expensive multiples despite the terrific growth that the chipmaker is expected to deliver.
But if you're looking for an alternative investment that will allow you to take advantage of the AI boom, ASML Holding (ASML 2.04%) could turn out to be a solid choice, especially after its second-quarter earnings report.
ASML's outstanding growth is here to stay
Dutch semiconductor equipment manufacturer ASML released its Q2 results on July 19, reporting revenue of 6.9 billion euros. That was at the higher end of its guidance range of 6.5 billion euros to 7 billion euros. Revenue was up 28% year over year, and it reported earnings of 4.93 euros per share, a big jump over the prior-year period's 3.54 euros per share.
Those results were better than what analysts had been looking for. Even better, management now expects 2023 revenue to increase by 30%, up from the earlier expectation of 25% growth. The healthy demand for ASML's photolithography machines, which semiconductor manufacturers such as Nvidia use to make advanced chips, powered the company's beat-and-raise quarter.
This is evident from the increase in the number of orders ASML is receiving. The company's net bookings increased to 4.5 billion euros in Q2 from 3.75 billion euros in Q1. As a result, ASML exited the quarter with a healthy order backlog of 38 billion euros. This tells us that ASML has enough orders in the bag to help it achieve its full-year revenue target of 27.5 billion euros, though it wouldn't be surprising to see the company exceed that mark considering the size of the backlog.
ASML delivered impressive growth and increased its guidance at a time when restrictions are imposed on its sales to China, and as memory chip manufacturers reduce their investments in equipment. The improvement in net bookings (i.e., sales orders for which ASML has received written authorizations) suggests that the company's systems remain in demand despite those headwinds.
But a closer look at ASML's business will tell us just why it continues to witness healthy order growth. When asked about the company's long-term prospects on the Q2 earnings conference call, CEO Peter Wennink said:
Beyond 2024, it's really the solid belief we have in the megatrends that are not going to go away. You can even argue that some of these megatrends, when you think about AI, are even more important than we thought let's say at the end of last year.
It isn't surprising that Wennink sees AI as an important megatrend for ASML. After all, the company will play a big role in the growth of AI thanks to its extreme ultraviolet lithography (EUV) machines. ASML points out that its EUV lithography machines enable chipmakers to "pack in ever more and tinier transistors to make the chips more powerful, faster and energy efficient," which are exactly the qualities needed for the chips that support the training of large AI models.
Nvidia's latest series of Hopper data center graphics processing units (GPUs), for instance, are manufactured by Taiwan Semiconductor Manufacturing on a custom 5-nanometer (nm) node. According to Nvidia, the H100 is at least two times faster than the previous generation A100 GPU in training AI models, and at least 15 times faster than the A100 in AI inferencing tasks. The A100 GPUs were produced using a 7nm manufacturing node.
So, shrinking the process size ideally translates into solid performance gains for chipmakers, which is why they are likely to keep moving to smaller chips for AI applications. Given that ASML's EUV lithography machines allow chipmakers to produce 7nm, 5nm, and 3nm chips, they should continue to remain in healthy demand as AI workloads increase. With the demand for AI chips expected to increase at an annualized rate of 30% through 2032, it is easy to see that ASML has a lot of room for growth.
Why the stock could double
ASML is confident of sustaining solid levels of growth in the long run. At its investor day in November, management predicted that it would achieve annual revenues of 30 billion euros to 40 billion euros by 2025. By 2030, ASML expects annual revenues in the range of 44 billion euros to 60 billion euros.
More importantly, the company expects its margin profile to improve substantially. It reported a gross margin of 51.3% in the previous quarter. By 2025, it sees its gross margin ranging between 54% and 56%, while by 2030, it expects the figure to land between 56% and 60%. The combination of improvements in ASML's revenue and in its margin profile should give the company's bottom line a nice boost.
ASML EPS Estimates for Current Fiscal Year data by YCharts
Analysts anticipate that ASML's earnings will increase at an annualized pace of 25% over the next five years. Based on that estimate, its earnings per share could grow from 2022's $15.86 to $48.40 in 2027. Multiplying the estimated earnings figure for 2027 by ASML's five-year average price-to-earnings ratio of 34 would translate into a stock price of $1,645. That's more than double its current stock price.
Also, you may have noticed that ASML is trading at a way cheaper valuation than Nvidia. That's why investors may want to act quickly and buy ASML since it is capable of delivering healthy gains over the long run thanks to catalysts such as AI.
