ASML's (ASML 2.04%) stock price jumped 9% to a record high on Jan. 24 after the Dutch semiconductor equipment maker posted its fourth-quarter report. Its revenue rose 13% year over year to 7.24 billion euros ($7.88 billion), which cleared analysts' estimates by about 300 million euros. Its net profit increased 9% to 2.05 billion euros ($2.23 billion), exceeding the consensus forecast by 180 million euros, while its earnings per share (EPS) grew 13%.
Those growth rates are impressive, but some investors might be wary of chasing ASML's stock at its all-time highs. However, I believe it's still smart to buy its rising shares hand over fist for three simple reasons.
Image source: Getty Images.
1. ASML has monopolized a crucial technology
ASML manufactures lithography systems used to optically etch circuit patterns onto silicon wafers. It dominates the market for lower-end deep ultraviolet (DUV) lithography systems, and it's the only producer of high-end extreme ultraviolet (EUV) lithography systems for producing the world's smallest and densest chips.
All the world's leading foundries -- including Taiwan Semiconductor Manufacturing, Samsung, and Intel -- currently use its EUV systems to manufacture their most advanced chips. ASML plans to tighten its iron grip on that market with its next generation of high-NA (numerical aperture) EUV systems, which will enable its clients to produce even smaller chips.
ASML's monopolization of the high-end lithography market gives it nearly unlimited pricing power. Its EUV systems cost about $200 million each, while its high-NA EUV systems cost over $300 million. That's why it expects its gross margin, which already expanded from 46% in 2018 to 51.3% in 2023, to reach 54%-56% in 2025 and 56%-60% in 2030.
2. ASML's slowdown should be temporary
ASML's revenue rose 30% in 2023 and accelerated significantly from its 14% growth in 2022. However, it expects its revenue growth to remain roughly flat in 2024, as the recent U.S. and Dutch export restrictions curb its sales of top-tier EUV systems to China (which accounted for 10%-15% of its total sales in the region in 2023).
On the bright side, ASML expects to cushion that blow by continuing its sales of lower-end DUV systems to Chinese chipmakers in 2024. It also expects its EUV sales to rise for the full year, even as the export curbs cut it off from the Chinese market, as it ramps up its shipments of high-NA systems to early adopters like Intel.
During the conference call, CEO Peter Wennink said the semiconductor industry was still "working through the bottom of the cycle" as it resolves the supply glut caused by the slower growth of the PC and smartphone markets but that its "end market inventory levels continue to improve" and are moving toward "healthy levels." Wennink also reiterated his previous outlook for "significant growth" in 2025 as the semiconductor market recovers and the company ramps up its high-NA EUV shipments.
For now, analysts expect ASML's revenue to dip 1% in 2024 but rise 22% to 33.3 billion euros ($36.2 billion) in 2025. That's in line with its target range of 30-40 billion euros, set at its latest investor day presentation in 2022. It also aims to generate 44 billion euros ($48 billion) to 60 billion euros ($65 billion) in revenue by 2030. That would represent a stable compound annual growth rate (CAGR) of 7%-12% over the next seven years.
3. ASML's valuations are still reasonable
ASML's EPS rose 41% in 2023, but analysts expect a 2% decline in 2024 as its revenue growth stalls out. However, they expect 41% growth in 2025 as the chip market recovers and the company sells a higher mix of high-margin EUV systems.
Based on those estimates, ASML might not seem like a bargain at 40 times forward earnings. But looking further ahead, it trades at only 28 times its 2025 earnings -- which seems like a reasonable multiple relative to its growth potential.
ASML is still a rock-solid investment
ASML's recent rally indicates investors are willing to look past its near-term slowdown and focus on its long-term expansion. If you believe ASML can continue to monopolize the high-end lithography market as the semiconductor sector expands, it's not too late to load up on its stock -- even if it's hovering near its all-time highs.
