ASML (ASML 3.33%) is one of the most important semiconductor equipment suppliers in the world. The Dutch company is the largest producer of lithography systems, which are used to optically etch circuit patterns onto silicon wafers, and it's the only supplier of high-end extreme ultraviolet (EUV) lithography systems.
All of the world's top foundries -- including Taiwan Semiconductor Manufacturing (NYSE: TSM), Samsung, and Intel (NASDAQ: INTC) -- use ASML's EUV systems to produce their smallest, densest, and most power-efficient chips. ASML monopolized this market by perfecting its EUV technology over the past three decades, and it's already rolling out its next generation of "high-NA" EUV systems to help those foundries produce even smaller and more powerful chips.
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ASML's dominance of this key technology made it a no-brainer play on the long-term growth of the semiconductor market. From 2018 to 2023, its revenue increased at a compound annual growth rate (CAGR) of 20% -- even as the chip sector weathered two cyclical downturns and a global pandemic -- and its annual gross margin expanded from 46% to 51.3%. That margin expansion was driven by its rising shipments of EUV systems, which cost about $180 million each and require multiple planes to ship. Its latest high-NA systems cost a whopping $380 million apiece.
ASML's stock has already risen nearly 350% over the past five years and boosted its market cap to about $380 billion. But could it nearly triple and reach a trillion-dollar valuation by the end of 2025?
ASML expects its growth to stall out in 2024
In 2023, ASML's revenue and earnings per share (EPS) rose 30% and 41%, respectively. But at the end of the year, it warned that it would generate nearly flat revenue growth in 2024. Two challenges will cause that near-term slowdown.
First, the U.S. and Netherlands are making it difficult for ASML to sell its systems in mainland China, which accounted for 26% of its revenue in 2023. The U.S. government already pressured Dutch regulators to bar ASML from shipping any of its EUV systems to China, but ASML continued to ship its older deep ultraviolet (DUV) systems -- which are used to manufacture larger and less advanced chips -- to Chinese chipmakers.
But this January, Dutch regulators revoked some of ASML's licenses for shipping its higher-end DUV systems in China. In response to those threats, many Chinese chipmakers ramped up their orders of ASML's DUV systems in the second half of 2023 and the first quarter of 2024 -- but those orders will dry up throughout the rest of the year. ASML can still sell its lower-end DUV systems in China, but it expects the export curbs to reduce its total sales to China by 10% to 15% this year.
Second, ASML expects high interest rates and other macro headwinds to cause its top customers -- including TSMC, Samsung, and Intel -- to rein in their spending on big EUV upgrades throughout the first half of 2024. That's why its total EUV bookings declined 60% year over year in the first quarter of 2024.
On the bright side, ASML reiterated its outlook for stronger growth in the second half of the year. For 2024, analysts expect its revenue to stay flat as its earnings dip 5%. But for 2025, they expect its revenue and earnings to grow 29% and 57%, respectively, as the macro environment improves and it ramps up its shipments of its latest high-NA EUV systems.
Will ASML join the trillion-dollar club by 2025?
ASML's stock would need to rally more than 160% to about $2,350 by the end of 2025 to boost its market cap to $1 trillion. But at its current price of about $900, ASML's stock still can't be considered a bargain at 45 times this year's earnings.
Looking ahead, analysts expect ASML's revenue and earnings to grow 10% and 18%, respectively, in 2026. Assuming it matches those estimates, exchange rates between the U.S. dollar and euro hold steady, and its stock still trades at 45 times forward earnings, its price could reach $1,600 by the end of 2025. That would represent a near-80% gain from its current levels -- which suggests its recent post-earnings drop is a buying opportunity -- but it wouldn't join the four-comma club.
