Semiconductor stocks have been in red-hot form on the market for more than a year now, but things haven't been all rosy of late. The PHLX Semiconductor Sector index picked up some momentum in May following a tepid performance in March and April, and that's not surprising as some major names in this sector have witnessed a pullback in their share prices, including ASML Holding (ASML 2.18%).
Let's see why that has been the case and check why investors would do well to buy ASML stock right away while it is still down.
ASML could regain its mojo despite near-term headwinds
Dutch semiconductor equipment giant ASML Holding gave the market a big shock with its first-quarter 2024 results. The company -- known for selling lithography machines that allow chipmakers and foundries to manufacture chips -- delivered mixed Q1 results. Its revenue was down 24% year over year to $5.63 billion last quarter, missing the consensus estimate of $5.87 billion.
The company's earnings also fell to $3.31 per share from $5.44 per share last year. While ASML management had already warned of a steep drop in its fiscal Q1 numbers, all eyes were set on the bookings the company receives for its manufacturing equipment. That's because ASML's net bookings indicate whether chipmakers are ready to invest in more equipment to meet the end-market demand. Yet the company reported a disappointing number on this front.
ASML received net bookings worth 3.6 billion euros in Q1, down sharply from the 9.2 billion euros worth of bookings it received in the fourth quarter of 2023. That was well below the analyst estimate of 4.63 billion euros. Not surprisingly, ASML stock has been pulling back of late. Shares of the company are down 11% from the 52-week high they hit on March 7.
If ASML stock continues to pull back and becomes available at a cheaper valuation as compared to its current price-to-earnings ratio of 47, investors should consider buying it hand over fist. That's because the company has maintained its full-year revenue guidance and expects its business to pick up significantly in the second half of the year. Moreover, it has a huge backlog of 38 billion euros, which should allow it to meet its 2024 revenue target of 27.6 billion euros, followed by another solid year in 2025.
More importantly, ASML's machines are mission-critical to manufacturing AI chips. That's because the company has a monopoly in the EUV lithography market, and these are the only machines that can produce chips on manufacturing nodes of 7nm and below. The likes of Nvidia, Intel, and AMD are all using the 5nm node for making AI chips, and they are expected to move to even smaller process nodes to make more advanced processors.
With the market for AI chips forecasted to grow at an annual rate of 36% through 2030, ASML should ideally witness more order inflow and be able to convert its backlog into revenue. That's why it would be a good idea to use the pullback in the stock to buy more shares and look beyond the quarter-to-quarter fluctuations in its bookings, especially considering that its revenue growth is set to accelerate strongly from next year.
The stock could turn out to be a solid long-term play
ASML reported $29.4 billion in revenue in 2023. As the following chart shows, the company is expected to deliver almost negligible growth this year. However, the semiconductor bellwether's growth is set to pick up strongly from 2025.
ASML Revenue Estimates for Current Fiscal Year data by YCharts
According to the chart above, ASML's top line could jump to $42.9 billion in 2026. The company's robust backlog and the new orders that it could receive thanks to the AI boom should allow it to hit that mark.
It is worth noting that ASML is currently trading at 12.7 times sales, which is why it would be a good idea for investors to capitalize on any pullback and buy more shares of this semiconductor company. Moreover, it won't be surprising to see the market rewarding ASML with a richer sales multiple once its growth starts accelerating, and that could allow the stock to deliver stronger gains in the future.
All this indicates that investors looking to add an AI stock to their portfolios should consider buying ASML as it could head higher over the next three years once its growth starts improving.
