Semiconductor stocks have been in fine form on the market over the past year, as shown by the 46% gains clocked by the PHLX Semiconductor Sector index. However, Dutch giant ASML Holding (ASML 2.45%) has underperformed during this period with a smaller jump of 35%.
Shares of the semiconductor manufacturing equipment supplier took a big hit after it released its second-quarter 2024 results on July 17. Though the company reported better-than-expected results and its orders grew faster than Wall Street's expectations, investors pressed the panic button.
Let's see why that was the case, and check if ASML management could opt for a stock split -- a move that many tech giants have undertaken of late -- in a bid to inject some life into its performance on the market.
NASDAQ: ASML
Key Data Points
Why is ASML underperforming?
ASML has been weighed down by factors out of its control in the past year. First, demand for semiconductor manufacturing equipment was tepid in 2023, falling 1.3% because of the weakness in the smartphone and personal computer (PC) markets. Second, sanctions imposed by the U.S. on sales of chips and chipmaking equipment have been weighing on investor confidence.
ASML stock fell nearly 13% following the release of its results, thanks to a report that the Biden administration may be considering stronger sanctions on the export of semiconductor equipment to China. Investors overlooked the fact that ASML's revenue of 6.24 billion euros and net profit of 1.58 billion euros exceeded consensus estimates of 6.03 billion euros in revenue and 1.43 billion in net profit.
Even better, ASML's net bookings increased 24% year over year during the quarter to 5.6 billion euros, easily exceeding analysts' expectations of 5 billion euros. ASML defines net bookings as all the "system sales orders and inflation-related adjustments, for which written authorizations have been accepted." The healthy year-over-year growth in this metric means that the demand for ASML's chipmaking equipment remains robust.
The jump in its bookings can be attributed to the growing demand for advanced chips deployed in artificial intelligence (AI) applications and smartphones. This was evident from the fact that ASML received 2.5 billion euros worth of bookings for its extreme ultraviolet (EUV) lithography systems, which are used for manufacturing advanced chips using process nodes of 7 nanometers (nm) or smaller.
Companies such as Apple, Nvidia, AMD, and Intel have been using or manufacturing chips based on 5nm and 3nm nodes, which explains why ASML's customers have increased their demand for its EUV machines. Additionally, ASML points out that it expects to put in a stronger financial performance in the second half of the year thanks to improving conditions in the semiconductor market.
Investors, however, seem to have taken issue with the company's guidance for the current quarter, which calls for 7 billion euros in revenue at the midpoint. Though that would be a 5% increase over the prior-year period and a stark improvement over the 10% year-over-year decline ASML reported in Q2, it is lower than the Wall Street estimate of 7.5 billion euros.
In all, it is not difficult to see why investors decided to hit the sell button following ASML's results. But will this prompt the Dutch company's management to take the stock-split route?
Will a stock split help?
Many companies have split their stocks this year to lower their share prices. A stock split is nothing more than a cosmetic move that does nothing to alter the fundamentals and market cap of a company. Still, companies make this move often with the belief that a lower share price will make the stock accessible to a larger pool of investors.
Nvidia, for instance, pointed out that it is executing a forward stock split "to make stock ownership more accessible to employees and investors." It is worth noting that Nvidia stock jumped significantly once it announced the stock split, but there's no guarantee that ASML would enjoy a similar boost even if it decides to make such a move.
Of course, with each ASML share trading at around $930, a stock split could -- in theory -- make the stock more accessible and increase its demand, leading to a bump in its stock price. However, savvy investors can consider buying ASML irrespective of any stock split because of its healthy long-term growth prospects. ASML's total order backlog stood at an impressive 39 billion euros at the end of the previous quarter.
And demand for its chipmaking equipment is likely to improve in multiple markets, such as artificial intelligence, smartphones, and PCs. Fortune Business Insights estimates that the global semiconductor market's revenue could grow at an annual rate of 15% through 2032, exceeding $2 trillion in annual revenue at the end of the forecast period. This should create the demand for more semiconductor manufacturing equipment that ASML sells.
According to one estimate, the annual revenue of the semiconductor manufacturing equipment market could hit $203 billion in 2032 from $84 billion last year. ASML is in a nice position to capitalize on this incremental growth opportunity, as it has a monopoly on EUV machines, so top chipmakers and foundries must turn to its equipment to make advanced chips.
With Market Research Future estimating that the EUV lithography market alone will grow fivefold over the next nine years, generating $63 billion in annual revenue in 2032 as compared to $12 billion last year, ASML could continue delivering healthy top- and bottom-line growth.
Investors should also note that this semiconductor stock has retreated 14% since its latest quarterly report was released. This pullback looks like a buying opportunity for those who want to add a potential growth stock to their portfolios, considering the robust growth ASML could deliver in the future, and astute investors can consider making this move regardless of any stock split.
