A new generation of semiconductors will begin cooking in 2024. Ultraviolet lithography specialist ASML Holding (ASML 0.23%), a crucial provider of equipment used to manufacture chips, began shipping its latest-generation extreme ultraviolet (EUV) systems to Intel.
Intel will begin development of its 18A manufacturing process using these machines in 2024, targeting widespread commercial production by 2025.
Despite the milestone, ASML will be coming off a record year for sales and profitability in 2023. The coming year, especially the first half, could get bumpy as the company catches up on its big backlog of customer orders, and chipmakers revamp their processes for next-gen semiconductors.
ASML stock carries a premium valuation (about 36 times trailing-12-month and one-year-forward expected earnings per share), so any financial bumps in the road this new year could cause some stock price turbulence.
If you're worried about short-term risks ASML is facing, but still believe EUV systems have a long runway of growth ahead, here's another small-cap stock you need to know about: Photronics (PLAB +2.11%).
NASDAQ: PLAB
Key Data Points
EUV isn't complete with ASML's systems alone
Lithography, including extreme ultraviolet (EUV), has become one of the key steps in the semiconductor manufacturing process. However, systems that companies like ASML make that produce the light source used in lithography are only part of the equation.
The light from a lithography machine is shone through a photomask (usually a multi-layer plate of quartz or other combination of transparent and opaque compounds) to print the lines and patterns onto the surface of a silicon wafer -- which ultimately gets cut into chips later on.
Photronics is a top producer of these photomasks. It just put the final wrap on another record year for sales and profitability in its fiscal 2023 (which ended in October) and is anticipating its momentum to carry into 2024.
Data by YCharts. TTM = trailing 12 moths.
Every time a new chip is designed, a corresponding photomask is needed for production. And with chips proliferating throughout new applications -- like industrial equipment and autos -- and more-advanced chips needed for consumer devices, enterprise-grade AI, and other uses, Photronics could be sitting on a big opportunity in the years to come.
Revenue in the first quarter of 2024 is expected to be up 3% to 7% year over year, so Photronics certainly isn't the fastest-growing semiconductor stock around. Chalk that up to some near-term industry weakness, like what ASML described in its last quarter.
However, what Photronics lacks in all-out growth, it makes up for with its successful focus on profit margin improvements. And the company looks poised to deliver next year. Adjusted earnings per share (EPS) are expected to rise 13% to 33% in the first quarter, building on its 23% adjusted EPS gain in fiscal 2023.
Photronics could be a cheaper bet on advanced chipmaking
A couple of secular growth trends are propelling Photronics' financial expectations. First is the steady adoption of more advanced chipmaking (including EUV from ASML) from numerous manufacturers. In its last quarter, Photronics said high-end applications made up 35% of its $164.5 million semiconductor (IC, or integrated circuit) photomask sales in the fourth quarter of 2023.
And second is high-end display technology (FPD, or flat-panel display) used in various devices from smartphones to TVs. Photronics is a leader in photomasks used in ultra-high-definition OLED (organic light-emitting diode) screens. These high-end photomasks for advanced displays made up 85% of this segment in the fourth quarter.
Given that Photronics relies on companies like ASML installing new lithography equipment for its own growth, the stock tends to trade for a discount to some of its peers in semiconductor manufacturing equipment. Its shares currently trade for just shy of 16 times trailing-12-month earnings, and under 12 times trailing-12-month free cash flow.
For those investors looking for a value on a small under-followed and underappreciated business, Photronics stock could be a top buy right now. Though it's a cyclical business model, as all businesses closely tied to manufacturing tend to be, Photronics has been doing well outperforming the current semiconductor industry slump of the last year and a half.
If chipmaking is gearing up for a new run higher, driven by developments at ASML and its ecosystem of chipmaking partners, Photronics could be ready to make some serious hay.
