Many investors may overlook ASML (ASML 2.04%) as a stock-split candidate because they don't know the stock or the company. On the one hand, semiconductor manufacturers worldwide depend on the Netherlands-based company for vital equipment needed to make their most advanced chips, but its position as a supplier to suppliers means that consumers are far removed from ASML's role in the tech world.
Nonetheless, the stock's growth over time shows that it has caught the attention of some investors. Moreover, the potential for continued share price increases could lead management to perform its first stock split in years.
Why ASML?
Thanks to emerging technologies such as artificial intelligence (AI), high-powered semiconductor chips continue to grow in importance and demand, a factor that highlights the importance of Taiwan Semiconductor (TSMC).
However, TSMC's market strength would not be possible without the extreme ultraviolet lithography (EUV) machines that ASML produces. Thanks to the rising demand for AI chips, the industry will need more EUV machines.
Furthermore, the push for more geographic diversification in the chip sector is helping drive demand for ASML. Around two-thirds of the world's third-party semiconductor manufacturing takes place in Taiwan, according to TrendForce. Amid geopolitical concerns, the U.S. and EU have offered tens of billions of dollars worth of subsidies to companies to build more fabs elsewhere.
Additionally, manufacturers such as Samsung and Intel aim to challenge TSMC's dominance in high-end chip manufacturing. Their plans on that front mean these manufacturers are buying more of ASML's equipment.
But why a split?
The best case for the company to conduct a split is arguably based on its past growth. ASML's stock has not split since it performed an 8-for-9 reverse split in 2007. And since the depths of the 2008-09 financial crisis, the semiconductor stock has risen over 36-fold. That has taken the price to more than $650 per share currently.
Moreover, with the increased need to expand manufacturing capacity and improve technology, the company's growth is likely to continue for years and take the stock price higher. In 2022, the company predicted the number of EUV machines it produced would triple by the 2025-2026 time frame, and that its total manufacturing capacity would expand by around fivefold.
Furthermore, ASML also has a more advanced EUV machine in the pipeline. It expects to sell approximately 20 of those per year by the 2027-2028 time frame. And given that manufacturers will probably need the newest machines to make the most advanced chips of that time, that will likely drive a new upgrade cycle.
These gains are especially impressive given the complex macroeconomic situation. In the first nine months of 2023, net sales increased 38% year over year to more than 20 billion euros ($22 billion). That gave it about 5.8 billion euros ($6.2 billion) in net income, up 52% versus last year. Slower growth in operating expenses allowed profits to grow faster than net sales.
Investors may have an opportunity to get a good deal on the stock, which is up only modestly this year. As the stock price grew more slowly than net income, ASML's price-to-earnings (P/E) ratio has fallen to 32, a level near its four-year low.
ASML and a stock split
Considering ASML's stock price and growth potential, it seems an excellent candidate for a stock split. The push for AI is likely to increase demand for the world's most advanced chips, and production of such chips is not possible without ASML's equipment. Also, reducing the nominal share price is an excellent strategy for inducing smaller investors to follow this stock and buy shares.
Nonetheless, ASML is under no formal obligation to split its stock, so investors should not act based on the expectation that one is coming. Still, with the company preparing to expand its production capacity, its market capitalization should rise regardless of its nominal share price.
