The semiconductor business is ramping up for the next stage in its cycle of production, and this is the one that involves massive growth. The current stage in the cycle saw the industry slow amid economic uncertainty, but explosive interest in artificial intelligence (AI) is expected to lead to exponentially more demand for chips.
To prepare for that next stage, semiconductor manufacturing companies need the right manufacturing equipment. The challenge comes from the fact that their competitors all need it too. While these fabricating facilities have several equipment manufacturers they turn to, those making the most advanced chips keep just one company in mind because it's the only one doing what it does well enough to meet their needs.
ASML is at the center of a chip-production revolution
ASML (ASML 2.04%) captured the lead in its industry thanks to its advancements over the past two decades in developing its exclusive, very complex, and very expensive extreme ultraviolet lithography (EUV) machines. Chip manufacturing giants like Taiwan Semiconductor Manufacturing, Intel, and Samsung cannot deliver the most advanced semiconductors at scale without the help of this Netherlands-based manufacturer.
Given the relatively sudden rising need for such advanced chips to handle AI-related calculations, ASML is expected to benefit greatly. AI applications such as autonomous driving and natural-language processing require the most advanced chips. The increased demand for AI chips was demonstrated most recently by Nvidia's recent revenue figures. Nvidia's Q2 revenue jumped 101% from a year ago and up 88% from Q1. Its (AI-related) data center revenue was up 171% year over year.
ASML is also expected to benefit from U.S.-China trade tensions. With approximately two-thirds of third-party chip manufacturing taking place in Taiwan, chip makers are moving to diversify their manufacturing base geographically. Governments in the U.S. and E.U. have each approved tens of billions in subsidies to get manufacturers to build away from Taiwan and new construction will also require new equipment.
Because of such trends, ASML expects to triple the production of EUV machines to 90 per year by the middle of the decade. Additionally, it plans to introduce the high-NA EUV machine in 2027 or 2028, which is its next-generation EUV machine.
ASML's financials
Amid such ambitious plans, ASML's rapid growth should not surprise anyone. For the first nine months of fiscal 2023 (ended Oct. 2), ASML reported net sales of over 20 billion euros ($21 billion), a 38% increase compared with the same period in fiscal 2022. Virtually all of this gain came from increases in system sales, as service sales levels did not change significantly.
Also, slower growth in operating expenses negated a significant increase in income tax expenses. That allowed for net income to rise to 5.8 billion euros ($6.1 billion) during the first three quarters of 2023, 52% more than during the same time frame in 2022.
The big issue for the company at the moment is that it will take time to ramp up production. As a result, ASML actually guided for no revenue growth in the next fiscal year. The industry outside of AI-related chips remains in a slump. That led CEO Peter Wennink to refer to 2024 as a "transition" year. It also likely explains the recent sell-off in the semiconductor stock that wiped out most of the stock price increases from earlier this year.
Still, the recent price drop could set ASML stock up for a massive run in 2025 as fabs scramble to bring more capacity online. Moreover, the price-to-earnings (P/E) ratio of 29 is a multiyear low for the company. Investors might want to look at that earnings multiple as a massive discount considering the increases likely to come after 2024.
ASML stock is a long-term buy
Despite a slump, ASML's dominance in EUV machine manufacturing could lead to considerable stock returns in the coming years. Admittedly, a slowdown in 2024 is disconcerting, considering the future demand for AI-related chips and ASML's unique ability to create the world's most advanced chips.
However, buying now allows investors to purchase shares at a relative discount. As the industry climbs out of its recent slump, a new bull market in the chip sector should lift ASML stock as it meets the rising demand that will likely benefit the chip industry.
