The semiconductor industry took a hit in 2023 thanks to a decline in sales of personal computers (PCs) and smartphones. The industry's revenue dropped 12% last year according to estimates. The sales drop also hurt the demand for semiconductor manufacturing equipment as foundries and chipmakers reduced orders for new equipment and focused on lowering elevated inventory levels. Spending on semiconductor fabrication equipment fell an estimated 15% in 2023, according to industry association SEMI. The drop explains why semiconductor equipment giant ASML (ASML +0.88%) issued a cloudy forecast for 2024 as order inflows slowed down.
Despite the gloomy forecast, there are signs of clearing skies in the new year that could help ASML deliver stronger-than-expected growth. Here's what's going on.
NASDAQ: ASML
Key Data Points
A chip shortage may emerge in 2024
Market research firm IDC expects the semiconductor industry's revenue to increase by at least 20% in 2024. Also, SEMI anticipates a 15% increase in semiconductor equipment spending this year, which is not surprising as demand is expected to return in key markets such as PCs and smartphones. At the same time, the semiconductor industry is getting a major boost from artificial intelligence (AI), as the demand for chips deployed in AI servers is going through the roof.
This could create a chip shortage, as the lead times for chips were high in 2023 even with demand slowing. According to contract electronics manufacturer Jabil, the lead time for chips used in non-automotive applications was an estimated 35 weeks, higher than pre-pandemic levels. Meanwhile, lead times for automotive and high-end chips ranged between 52 to 78 weeks.
For instance, the waiting period for Nvidia's flagship AI graphics card, the H100, reportedly ranges between 36 weeks and 52 weeks, according to market research firm Omdia. Not surprisingly, chipmakers and foundries are busy ramping up their production capacities so that they can manufacture more advanced chips such as the H100.
What's more, Nvidia is reportedly going to move to an even-more-advanced 3-nanometer (nm) manufacturing node for its next-generation graphics cards. Not surprisingly, the demand for advanced chips based on 3nm and 5nm nodes is set to grow at a solid pace in the long run. For example, Foundry giant Taiwan Semiconductor Manufacturing -- popularly known as TSMC -- believes that its 3nm process could generate a whopping $1.5 trillion in revenue over the next five years.
As such, foundries will need to invest more money into manufacturing equipment. This is where ASML comes into play, as it is the only supplier of extreme ultraviolet lithography (EUV) machines, which allow foundries to make chips using advanced process nodes. It is worth noting that each of these EUV machines could cost a whopping $300 million.
ASML has started shipping these, with Intel becoming the first customer to receive the latest EUV lithography system. Other chipmakers such as TSMC, Samsung, Micron Technology, and SK Hynix have also placed orders for these EUV-chip manufacturing units. As such, it is easy to see why the EUV lithography market is expected to clock annual growth of 28% through 2029, and this is one of the reasons why ASML is projected to deliver healthy long-term growth.
Investors are getting a good deal on ASML stock right now
Analysts estimate ASML's annual revenue of $30 billion for 2023, an increase of 27% over the previous year. Its earnings are forecasted to increase 36% to $21.54 per share. Analysts, however, have tempered their expectations for 2024 owing to ASML management's cautious guidance for flat revenue growth. But as the following chart shows, ASML's top and bottom lines are anticipated to jump nicely in 2025.
ASML Revenue Estimates for Next Fiscal Year data by YCharts
However, ASML could turn in a better-than-expected performance in 2024 as well. That's because the company reported an impressive order backlog valued at 35 billion euros at the end of the third quarter of 2023, which equals almost $39 billion at the current exchange rate. Given that the demand for semiconductor manufacturing equipment is anticipated to increase in 2024, ASML may be able to convert more of its backlog into revenue and deliver stronger growth.
That's why investors should consider buying ASML right away, as it is trading at 35 times trailing earnings, a discount to its five-year average price-to-earnings ratio of 42. Its price-to-sales ratio of 10 is also in line with the five-year average. Also, analysts are anticipating ASML's bottom line to increase at an annual pace of 24% for the next five years. Based on its estimated 2023 earnings of $21.54 per share, ASML's earnings could jump to $63.14 per share in 2028.
Assuming ASML trades at a discounted 30 times earnings in 2028, its stock price could jump to almost $1,900 per share in five years. That would be a 2.5x jump from current levels, which is why investors should consider buying this semiconductor stock hand over fist while it is still trading at relatively cheap levels.
