Artificial intelligence investing is intriguing because there are many ways to capitalize on this technological shift. Whether it's software or hardware, there are a lot of products in the AI value chain. However, one is universal among all of them: chips. And to make the smallest, most powerful varieties, you need a specialized extreme ultraviolet (EUV) lithography machine.
Currently, only one company worldwide has the technology to make these: ASML (ASML 2.04%). With such a grasp on an important market, ASML becomes one of the best ways to invest in AI simply because it has a monopoly on a product that is required for chips that power AI.
ASML's products are one of a kind
ASML is based in the Netherlands, subjecting it to different laws than the U.S. However, the Dutch and U.S. government are aligned in their interests to keep some of these cutting-edge machines out of the hands of China. Its EUV machines have been banned from China since the beginning, but some DUV (deep ultraviolet) machines will also not be allowed to be sold.
Still, ASML expected this and commented that this policy change would not affect its financial guidance. Additionally, some of ASML's machines can still be sold to China, just not the highest-end ones.
Image source: ASML.
Even though the potential largest customer in the world for its most cutting-edge products is scratched off the client list, ASML is still doing quite well. In the second quarter, ASML's sales rose 27%, and net income increased 38%. That was good enough to increase its earnings per share (EPS) from $3.54 to $4.93.
That was a solid quarter, and management expects it to continue for the rest of 2023, as it guided for net sales growth of around 30% for the entire year. That's a lucrative business, especially considering ASML only sold 107 new and six used units in Q2.
As demand for more advanced chips grows, ASML machines will be utilized to meet the challenge. As a result, its future looks bright. With all that in mind, is ASML stock a buy now?
The stock is reasonably priced for its market position
Before addressing stock valuation, investors must consider that ASML has a practical monopoly in its industry. Because of this, it's pretty apparent ASML's stock will have a valuation premium. However, it's not too pricey at 35 times trailing earnings and 32 times forward earnings.
ASML P/E Ratio (Forward) data by YCharts.
Considering that many other AI-focused companies trade at much larger premiums than ASML, the stock is intriguing at these levels.
Another boost to investing in ASML is its dividend and share buyback history. While ASML pays a humble dividend (the dividend yield is around 0.9%), its payout ratio (how much of its earnings it pays out to investors in the form of dividends) is only 32%, showing that the dividend has plenty of room for growth.
Although its share repurchase activities aren't as aggressive as some companies, ASML still reduced its shares outstanding by more than 10% over the past decade.
ASML Shares Outstanding data by YCharts.
So with all those items in mind, ASML looks like a no-brainer buy when looking for an investment in AI. Without ASML's technology, the chips that power massive data centers to create AI models wouldn't be possible. With that valuable position in the market, ASML is an irreplaceable company and makes for a great investment.
